You can almost hear the huge Eurozone sigh of relief as the possibilities of Frexit seem to be diminishing. The reason is of course, the predicted outcome of the French Presidential elections with most polls suggesting Emmanuel Macron is almost certain to win. Of course it would be foolish to completely rule out Marine Le Pen, it wouldn’t take much to swing opinion towards the anti-euro party. Many French voters dislike both candidates which is normally a recipe for a shock.
The next big Euro worry is likely to be from Italy where anti-Euro sentiment is much stronger that France. Italy has also suffered more than most in the recent financial storms, look at the performance of the various Euro-bonds and you’ll find that Italy’s are among the very worst performing out of all the Eurozone countries.
Take for example an Italian 10 year old bond yield and compare it with a German equivalent and you’ll see a huge spread in the relative values. The Italian bond is rated significantly lower in value than the German ones which represent the political and economic risk the country faces.
This situation is made worse by the potential result in the forthcoming Italian election. Dubbed by many to be the most dangerous event in Europe, the markets are scared that Italy could vote to leave the Eurozone. The ant-Euro party, 5-Star are now the highest rated party in Italian opinion polls. You can see the sort of populist support by merely watching Italian TV for a few hours, try the method in this post entitled – RAI Streaming esturo for a cross section.
They are not alone in Italy many of the other Eurosceptic parties are also doing well which doesn’t bode well if any referendum was help. It is widely believed that if there was an election in Italy now – the 5 Star party would almost certainly win.
Would this create the ‘QuItaly’ situation that European leaders dread is difficult to guess? There is no doubt that political populism is on the rise in many European countries and Italy is simply one of many. There is also the feeling that the Italians are much less pro-Euro than the French.
Even without this actually happening, the political and financial damage of uncertainty is bound to effect the markets. Italian debt is being downgraded which further decreases the value of Government bonds. The ultimate effect is that the huge Italian debt becomes more and more expensive to service.
There seems to be little that can stop the momentum which is propelling South Africa towards the lowest credit rating possible on the international markets. The latest setback involves S&P (Standard and Poor) reported by the BBC (use a VPN for access) who have downgraded the country’s credit rating to junk status after the finance minister was dismissed suddenly.
The global ratings department of S&P brought South Africa’s sovereign debt rating down because it considered the sacking of the respected finance minister, Pravin Gordhan a risk to the implementation of the country’s fiscal policy.
Needless to say this had a negative effect on the markets as the Rand plummeted by nearly 2% against the dollar while the value of Government bonds dropped sharply too. The depreciation fall was the worse in nearly two years and came in response to the sacking of the finance minister and also other cabinet members.
The credit rating is important to all countries as it has a serious effect on the interest rates the country pays when borrowing on the international markets. It has surprised many that the President risked this turmoil when he knew that the agency was going to be announcing an assessment on his country’s prospects.
The country has not reached the ‘junk’ status that most countries fear but currently are only two points above that rating. However there is a real possibility that the other major agencies will similarly cut their ratings too for the country. If South Africa does end up with ‘junk’ ratings there will be profound effects for the economy as a whole. Many pension and investment funds for example will automatically sell their bonds if they reach this status which will cause further pressure on their value. This will mean that the government’s borrowing costs will rise sharply which as they are running a large deficit will be substantial.
This is not the first of the emerging economies to suffer such a downgrade, Russia and Brazil both were downgraded to junk status in 2015 due to their struggling economies. It will certainly add to the pressure on President Zuma and you can see on the local TV broadcasts that this is rising substantially. You may need to use a good vpn service like this to access some of the African only broadcasts on local Television channels.
Donald Trump doesn’t like surpluses, specifically those trade surpluses that many countries run with America. The US has huge trade deficits with many countries including China, Mexico and Germany – something he seeks to change.
Germany is no stranger to surpluses of many sort, this year they announced another huge current account surplus of 9% of GDP, higher than even the South Koreans of 7%. It is unlikely that this is a problem to the countries themselves but how about the global economy.
Where does all this surplus go? Well the vast majority of it exists in global financial assets which will be owned by countries like Germany and the others running large credit surpluses. These are of course simply investments and may rise or fall in value just like anything else. It is useful for countries to have these assets especially in a time of aging populations and growing demands on care and health costs.
The simple fact with trade surpluses is that by definition they have to be balanced by deficits in other countries. The huge trade surplus or balance in one country will be matched by similar deficits in other countries, hence President trump’s wrath – America is funding these surpluses in many places.
Having a huge imbalance is not sustainable in the long run for any country and is basically not good for international or global trade. These are not just numbers on a balance sheet though, surpluses and deficits represent people’s jobs and livelihoods o(or lack of them).
Unemployment can be the result of running large trade deficits but this is not always the case. Both the UK and the US run substantial trade deficits alongside relatively low levels of unemployment. The problem really is where this money ends up, the amounts of money that are taken out of the global economy due to unneeded current account surpluses.
The German’s often have a reputation for being spendthrift or careful savers, however that’s not supported completely by the figures. In fact if you watch global TV which many Germans do – check out German’s who watch BBC iPlayer through VPNS for instance. However the question is what happens to that money the German’s simply don’t need, is it all diverted into valuable infrastructure projects around the world? Some is but more often it gets related into property speculation schemes or high return financial projects which bring little benefit to ordinary economies around the world.. Sometimes this money can be traced to events which cause even more financial chaos such as when American housing bubble which ended up causing the 2008 financial crises.
Author of the Italian – Rai Streaming Estero
The path to prosperity doesn’t lie amidst countries building even bigger international debt states Akinwumi Adesina, the head of the African Development Bank. He is quite clear when he urges the continent’s governments to try and boost tax revenue not grab yet more international loans. The statement comes whilst Africa, once again grapples with an economic slump.
Mr Adesina is reported with an interview in the Financial Times to be expecting yet another downturn in the economy of Africa largely being triggered by a slump in commodity prices. This issue greatly affects Africa as well as the slow down in Chinese economic growth. Yet as always Africa is one of the first to suffer from external economic slowdown, largely because of it’s relative financial weakness, in other words it’s large levels of debt.
The phrase ‘fiscal consolidation’ is often used to describe Africa’s position and potential solution. The reality is that decades of borrowing have had only limited success in delivering long term growth in the region. Sure when economic booms are happening in other places, Africa is dragged along through a demand for it’s commodities but the weakness is evident as soon as this demand drops. Nigeria has plunged into yet another recession simply due to the oil price fall, although to be fair this is the first for nearly twenty years.
The pattern will be repeated across sub-Saharan Africa, with GDP falling from it’s 3.5% level in 2015. Many nations are suffering from dwindling government revenues, and the wide budget deficits mean that governments have little monetary options available to them. The temptation of increasing debt is always there but this is precisely the reason why African economies are so vulnerable, billions of dollars of debt taken up in the ‘good years’ reduce the capacity of these governments to respond in a slump.
These debts have to be repaid and the costs of servicing them often rocket in poor economic conditions simply because of the weakness of most African currencies. The scarcity of foreign currencies also impacts African countries and businesses to invest.
Borrowing overseas with a weak domestic currency is a recipe for disaster, investment funds should ideally be sourced locally. For example there are huge African investment and pension funds which ideally could be used to support the African economy. Too often this money is invested in Western countries and businesses to the detriment of African businesses. It’s often depressing to sit in the presentations of these Pension and investment funds produced by some anonymous company who conducts most of their business through a residential VPN (see here) to be extolling the virtues of some international company with minimal links to the African continent when local companies are starved of investment and the potential for growth.
Ireland has had it’s economic problems in past years, much of it documented in these pages. However Ireland’s recovery still continues and is showing the lead for other debt laden Eurozone countries to follow. It’s a template which perhaps countries like Greece, Spain and Italy should look to follow. For the fourth year the small republic has produced the highest growth rates of an country in the Eurozone and it looks likely to continue with some forecasts suggesting that 2017 will produce a growth percentage of nearly 3.5%.
Ireland instigated some pretty tough measure to pull itself out of the previous crisis and has been rewarded with rises in foreign investment and soaring levels of employment. This has already filtered in to the general economy with strong retailing figures supporting the recovery.
Some economists are even predicting higher growth figures with mentions of 4% becoming more common. Yet there is a huge black economic cloud circling which will restrict this growth and nobody quite knows by how much.
Of course, it’s Britain’s decision to leave the EU and as by far Ireland’s biggest trading partner the impact is bound to be large. The general consensus is that the impact of Brexit will initially be fairly negative even to the extent that it is bound to cause some disruption and uncertainty. However no-one is quite sure when this will happen and what the impact will be on the irish economy.
No other Eurozone member will be impacted as much as Ireland however and most economists are unclear of what the long term impacts will be. The agricultural sector is the most important sector likely to be affected as the country’s farmers send over half their exports to the UK. It is a large, convenient and essential market which is not easily replaced if it ends up falling into a mass of tariffs and controls.
Still much of this is pretty much out of the Irish government’s control and a a strong economy at least allows it the maximum possibilities or riding out any economic impact when the UK leaves. As such Irish businessmen and politicians will be pleased that they can watch BBC in Ireland using a VPN to keep up with the developments. It is likely that the UK government will also seek to restrict any changes made in the two countries trading agreements as well, the UK is likely to need a friend in Europe and difficulties with borders will only cause problems for both countries.
There are many countries who despite looking prosperous on the surface face huge risks to their economy. One of those is Australia who some experts fear may face a huge economic slump if global events go against it. The problem is once again that of debt, in a variety of forms – Australia has huge household debt, a record level of foreign debt and the potential risks of a massive housing bubble which has developed over the last ten years.
We live in a turbulent times for the global economy and it doesn’t take much to tip debt laden economies over the edge. In modern times consumers are much more used to higher levels of consumer debt yet these levels are now at record highs, only the depression of the 1920s has there been the same figures. In the short term this might be sustainable as long as the economy is growing sufficiently, some statistics report that Australia’s level of household debt as a proportion of household income stands at an average of 187%.
Anyone can see that this level puts the economy in a perilous position, any shocks can send families in a spiral of debt and repayment problems dragging the Australian economy with it. High levels of sustained household debt rarely end well, and in fact they mirror all of the biggest Australian economic depressions of the last century.
It’s not just consumers who are drowning in debt either, Australia’s net foreign debt has been rising too and now stands at a record level of over 63% of Gross Domestic Product – the levels are eye watering for a relatively small economy at over $1 trillion. Again this is probably sustainable in the short term but any global events, a government crisis or banking issue would make Australia extremely vulnerable.
Much of this is a direct result of Government fiscal policy with a huge amount of credit being expanded in all sectors of the society. The housing bubble has been a consequence of this expansion of credit with housing credit now at a level of 95% of Australia’s GDP compared with about 20% in 1991.
Other levels of credit such as that directed towards business investment has not risen to such a level and has been fairly static. Many Australians look across at Europe and North America and feel that they are far removed from any financial risks yet that is simply not the case. You can sit and watch the BBC in Australia of course using a VPN yet in many ways these economies have some of these same risks yet on a lower level simply because of the size of their economies.
The levels of debt ranging from consumer to government represent a huge problem to the Australian economy however it seems that there is little political motivation to correct them. Bringing down debt and raising taxes is never a popular move but sometimes it’s a prudent one!.
The Zimbabwe economy has many problems but there’s one that’s threatening to finally to tip the balance into possible disaster. Simply speaking the economy has run out of cash, leaving many sectors unable to function properly.
Typically a business will deposit money into their bank accounts but that doesn’t help. Normally payments can be made electronically but usually only locally, most businesses will not be allowed to make payments outside Zimbabwe. Obviously this is crippling for any firm which needs imports or foreign materials to support their core business.
The freeze on liquidity has affected all sectors, companies have been unable to pay their workers in cash. Any sector which needs foreign suppliers have struggled because they’ve been unable to pay them, most of them just went out of business creating even more problems and unemployment. It is estimated that the Zimbabwe economy shrank by 0.3% last year but that’s set to fall steeply to contract nearly 3% this year according to the IMF.
It is thought that the economy might slowly improve after Zimbabwe abandoned it’s defunct currency eight years ago and adopted the dollar. The move at least stopped the raging hyper inflation unfortunately did little to help all the other problems in a floundering economy. Indeed the strong value of the dollar made the situation even worse, exports are virtually non-existent and imports have become much more expensive. There are very few banknotes left in circulation which makes day to day life very difficult for most Zimbabweans.
The typical reactive measures are being implemented which do little to solve any of the underlying issues. The latest is a cap on withdrawals for customers at ATMs of $150, the reality is that this hasn’t been possible for months anyway. No-one knows how much cash is circulating in the economy, the Reserve Banks suggests it’s about $4 billion however more impartial estimates think it’s about $100 million.
Unless action is taken soon, then the situation is only going to get worse without the ability to pay workers and suppliers businesses will obviously fail. It would be surprising if the incompetent government led by Robert Mugabe will do anything constructive, the usual tactic is to blame foreign intervention for it’s economic woes. The Mugabe Government has halved the size of the economy since 2000 with a variety of ridiculous decisions.
The most damaging was probably the land seize authorised by Mugabe. Taking profitable, successful white owned farms and handing them over to individuals with no interest or skills in farming, crippling the agricultural sector in a few years.
The world is full of extreme inequality, arguably globalism has made this worse but although there are plenty of idealistic rants against this disparity it’s difficult to find genuine real-world solutions. Unfortunately Jeremy Corbyn, the Uk Labour leader, also seems to be struggling finding a sensible solutions too. His latest suggestion is that the British Government should instigate a cap on maximum wages in order to address this issue.
Let’s think about it for a minute, it’s about rich people right? Rich people have too much money, take most of it off them and set a ceiling and we’ll all be more equal. It might work in a socialist economic workshop but unfortunately in the real world there are many reasons why it would be a complete disaster.
Most successful Western economies are pretty aspirational, people generally don’t hate high earners. They don’t boo the overpaid Premiership footballers off the pitch because of the size of their wage packets. In fact you could guarantee the cries of despair if the millionaire superstars left to play in more lucrative leagues. We don’t despise rock stars, well paid actors or a host of other overpaid people – mostly we feel just a little jealous and hope to be in the same situation.
Imagine a country where you knew if you became successful past a certain level the government would take all your cash off you. How would they do it, is just one of the obvious problems. You can guarantee that there would be a mass exodus of high achievers before they reached that level. A guaranteed consistent brain drain would obviously help with inequality as everyone would get significantly poorer and the rich would move countries.
Even those who stayed would likely have numerous method of avoiding any ceiling, their wages would be transferred in shares, dividends, bonuses and routed through a selection of financial instruments in order to avoid whatever legislation was in place. Say goodbye to economic growth, to wealth generation, to risk taking and investment, to job creation – to the rewards that create entrepreneurs and new businesses.
Even for those of us who think there is a genuine problem in how wealth is distributed in the global economy – this is a seriously flawed idea. It just makes everyone poorer, the economics of envy simply doesn’t work in the real world.