The future of emerging markets

23rd July 2012

The future of emerging markets

While there might be cyclical reasons for the economic slowdown in emerging markets, Greg Ip argues the policy and structural frameworks within those countries may impede potential growth in the future. The Economist

 

Bernanke's dilemma

Put simply, the Fed faces a dilemma: The US labour market remains depressed and is unlikely to pick up steam anytime soon; meanwhile it is not clear that there is an obvious deflationary scare for the fed to engineer another round of quantitative easing. So what exactly can the Fed do? Gavyn Davies explains the Fed's options. FT

 

The British ask…… the IMF

Three Brits ask the IMF three questions: When is the economy going to get better? What are the prospects for UK youngsters in an increasingly global economy? And what are the funds views on how those responsible for the UK and European economies can work more effectively together? (All easy questions, right?) IMF

 

Global impact as drought wilts US crops

With the US in the midst of its worst drought in decades, John Hendren reports that the parched soil in the Midwest could have global repercussions. "Corn is a mega-crop and a bad year drives up the price of everything from beef to cereal to auto fuel." Al Jazeera

 

Libor's Al Capone moment

Even though nobody could get Al Capone for murder, prosecutors did finally nail him for tax evasion. So is Libor going to be the scandal that will finally see the villains of the financial-crisis jailed? Or will Libor jailbirds be little more than a hollow symbol? Reuters

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32 thoughts on “The future of emerging markets”

  1. Guest says:

    Great summary as ever Shaun. It’s theft in plain sight by €bank / IMF no matter how they try to dress it! Do you think the Russians / others with €100k+ accept haircuts of 40% or more quietly?

    Tellingly Russia haven’t given their reaction to the ‘solution’ yet so it might not be all a done deal. I also can’t believe the way they have structured this means the €bank / IMF bypasses the need for the Cyprus parliament to vote on it again too.

    Worrying times…

    1. Justathought says:

      Cyprus parliment…. the president brother is a notorious criminal, in and out of jail, the finance minister is battling a “rubycase” (sex with underage woman in orgy) and still were recently voted into office ????

  2. Justathought says:

    Hi Shaun,

    Great report as usual.

    The Cyprus saga demonstrates that the bailout is in line with the future SSM
    (Single Supervisory Monitory)…. (Politicians who’d no longer have to bamboozle voters into bailing out banks because it would be done by a distant power, the 23 members of the ECB). In fact we are turning into a “liberal dictatorship” coined by Friedrich Hayek.

    Mr Vladimir Putin and the Russian’s isolationist movement must be laughing to the stars.

    Your prognostic for 20% of economic decline Cyprus might be overoptimistic, isn’t that Iceland, after five years now, not relinquished her own Capital control?

    And yes the recovery is on track as suggested last week by the bail out in
    Germany of the world’s top ship-financing bank, HSH Nordbank.

    Interesting time we are living in…

    1. Anonymous says:

      Hi Justathought
      Sadly I think that the economic decline in Cyprus will exceed 20% but hope that it does not really snowball. Unfortunately the prognosis is not great as the Eurocrat clowning appears ro have continued all day.

  3. Alex says:

    If you ever had any doubts there can be no clearer sign – the average man, the average family, working and paying your way, you are a pawn of no consequence to elites. Your home, your small business, your life’s toil of work, are not worth their unused toilet paper in the great scheme of things. Usury is a bankrupt system before its begun. Until we have sound money, everything is a house of cards.

    That’s the bank account done. When do they start on your pension? Then its your property, and all the while, rolling out the QE, the coinage in your pocket gets devalued. Left right and Center.

    Once again, Chris Rea, This ain’t no technological revolution, the roads are jammed up with credit.and there’s nothing you can do….and its all just bits of paper – flying away from you… this is the Road to Hell.

    1. Anonymous says:

      Hi Alex
      Actually they had a good go at the Irish pension system when they constructed the Irish bailout. The Irish sovereign wealth fund found itself stuffed full of Anglo-Irish shares and the like which promptly headed towards worthlessness. Oh how Irish pensioners will rue that one day.
      What is plain is the lack of template or plan as if savers and pensioners are included it should be similar percentages each time. But as you point out the bankocracy does not seem to be much bothered by fairness,consitency or logic.

  4. Pavlaki says:

    Time after time the Euro ministers manage to frighten governments and populations of the countries in trouble into believing that staying in the Euro is their least nasty option. It has worked again. I know that you believe (as I do) that some countries would be better off outside the Euro in the long term. I would be very interested to hear how bad you think this financial Armageddon that is threatened would actually be? I think that there is a lot of self interest here to protect German, French and other countries banks rather than genuine concern for the future of Cyprus – or am I being too cynical? I also believe that a reasonably orderly exit of one country from the Euro would be a huge confidence boost for financial markets and that it is in the Euro zones interest to help this process. They keep telling us that the Euro is like ‘Hotel California’ in so much that you can join but never leave – does it have to be that way?

    1. ernie says:

      Pavlaki, you have hit the nail squarely on the head. This whole process is again a bluff on the lines of the chicken licken fairy tale. If you leave the euro, the sky will fall down. Of course, the “cure” is worse than being put to death – really sometime, someone is going to have to call their bluff. Yes, withdrawal would be very painful for a while, but on a 5-year out view recovery would be at least possible. This regime makes recovery impossible on any time frame.

      1. Anonymous says:

        Hi Guys
        The worst part in my view is that the Euro looks likely to fall down anyway. This of course means that much of the pain in unncessary and even worse futile.

        1. Sovjohn says:

          For your “Euro looks likely to fall down” part of comment:

          http://www.youtube.com/watch?feature=player_detailpage&v=Xy_9bx6U8_0#t=168s

          Kind of conveys my feelings as things have come :)

  5. Enexoumeypothesi says:

    10bln euro going into 2 insolvent banks to save what? Let them go down, exit euro, jail the bankers and politicians (and confiscate their assets) that brought us into this mess and slowly start rebuilding the country . A lot will be lost in the process but at least there is some hope as Iceland has shown.

    1. Anonymous says:

      HI Enexoumeypothesi and welcome to my part of the blogosphere.

      It is a shame that there is no-one present at these meetings to ask precisely that question. Rescued banks by defintion delevergae and retrench and the history so far is that they provide dreadful value for their bailouts as Bankia of Spain has proved one more time only today. For those who have not followed it today’s recapitalisation lead to a further 41% fall in its share price making a one year return according to Bloomberg of -95%.

  6. Joe says:

    Excellent as ever Shaun.
    Awful, awful prospects for Cyprus, but is there for once a glimmer of good news in that creditors and depositors are taking the hit instead of socialising the losses all onto the taxpayer?

    1. Anonymous says:

      Hi Joe
      I take your point although a lot of the creditors and depositors are Cypriots so they are likely to be taxpayers. In some ways it is an awkward theoretical question as my profession has come to imply that they have a responsibility for the banks and their behaviour which I think is going too far.
      To the extent that the depositors are foreign then there is a gain and it does not seem so bad if they are investors of ill gotten gains although explaining that to the Russian Mafia may be a life shortening move! But some of these depositors will be ordinary people who trusted the system and its promises…..

  7. DaveS says:

    Hi Shaun

    Totally agree, Cyprus is facing economic collapse.

    Can I ask would you have advocated that Cyprus exit the Euro ? In the immediate aftermath this might have had similar repercussions ?
    i.e. losses (probably greater than 30%) for all depositors, capital controls, collapsing GDP, IMF loans with IMF imposed austerity (if they were lucky) but also massive inflation making every Cypriot poorer.

    Either way, the people of Cyprus are facing a massive downward adjustment in their living standards, an adjustment they didn’t believe was possible -that’s a dangerous and unpredictable situation for any democracy.

    1. Anonymous says:

      Hi DaveS
      Yes I would and did not say so because I wanted to concentrate on reality rather than opinion today. All roads forwards are poor I agree but the reasons why I think a new Cypriot pound would be an improvement are as follows.
      1. The Euro is proving a barrier to reform and change in the countries which most need it,whereas the shock of a devaluation will be likely to lead to change.
      2. Whilst there are problems from a devaluation as you point out there are also gains. This way round there are only losses.

      1. DaveS says:

        Thanks Shaun – very accurate, succinct and dare I say patient response !

        I seem to be the only one arguing against Euro exits on the blog, but thank you for listening to my arguments.

        I suppose I have a much more pessimistic view of the economic situation. I think your argument that the periphery will have a chance of a better future outside of the Euro would be true if I believed that Europe will recover i.e. this is a cyclical downturn which will eventually be followed by recovery.

        I feel the West is experiencing a much more serious economic collapse – an end of empire event. In this situation the bankrupt periphery will not be able to recover through devaluation. Tourism and manufacturing exports will simply not materialise as expected and they will resort to money printing instead. I think we are seeing this in the UK right now – devaluation isn’t working as expected, the economy isn’t recovering, QE isn’t going to stop.

        Staying in the Euro might delay the inevitable, perhaps buy them a few more years of the Western lifestyles (albeit reduced) they incorrectly assume they are entitled too.

        1. Sovjohn says:

          As a Greek (the horror!) I can say this regarding your point:

          I understand the ‘end of empire’ analogy, however it is simply untrue that people in Greece (or Portugal, or Spain, or…) are “not working” as their northern counterparts might work.

          In fact, even pre-crisis, in say, 2007, it was quite common for employers to actually abuse their employees with loads of unpaid overtime, or with demands which cannot be met by a single person only, compared to UK, or Germany, where I know how things work.

          The increased “labor” does not lead to productivity gains in countries of the South because of increased overhead and systemic issues, such as the structure of the State, bureaucracy, red tape, corruption, etc.

          Whilst being Greek, I only needed a 15′ appointment to get a personal tax number issued…in Netherlands. The same procedure would, optimistically, set me back by an hour or two in Greece (and most often than not it might require multiple trips to separate public administration offices, so even more time ‘wasted’).

          If that’s the case, then countries of the south suffering from similar symptoms are not organized / run as properly as countries of the North, but this also means that they do not have the same expectations.

          Many people I know, even pre-crisis, would gladly like to have 8-hour jobs somewhere, with no degree of abuse involved, but they did not. As such, if ‘the fall of living standards’ are you are implying means a more chaotic situation where people are (effectively) working longer to gain the same amount of money – The South is already there.

          If this would burst the bubble of…the north, where I’ve seen many times roads being congested, even in UK, at 17:something when everyone got off work like everybody else, then yes, this would burst a bubble there.

          But the Euro is not making any southern state (and I include France in them) any favors, since they operate differently on a fundamental level.

          1. DaveS says:

            Apologies – I don’t have Shaun’s talent for concise writing.

            I don’t see this as a Greek, Cypriot or periphery problem – rather as a much bigger bankruptcy problem for the West – UK, France, Germany, USA etc included.

            In short I feel globalisation has killed the West – it simply can’t afford its welfare states and in case of USA/UK & France (maybe Greece) its defence spending. With the exception of Germany and one or two others, the economic model is broken, (But Germany won’t escape either courtesy of the Euro,)

            So lifestyles for most in the West are about to shift radically downwards. The Greeks and Cypriots etc are just a bit ahead on the downward trajectory but I am afraid there is probably a lot further to go for everybody.

        2. Anonymous says:

          Hi Dave,

          I’ve previously suggested that Greece should default on it’s bonds, run a very tough budget and retain the euro. Price stability is a benefit. Even if the eurogroup eject Greece, they cannot stop Greeks from unofficially using the currency.

          The problems here include
          1 ) The politicians receive very good pay and don’t want this cut regardless ofr what harm befalls their country & citizens.
          2 ) The Greek markets include some highly priced goods – competition should reduce these prices, but these markets don’t seem to function properly.
          3 ) Spending cannot exceed tax revenues.

  8. Sovjohn says:

    In my view, the long-term repercussions will be quite horrible for Cyprus. They are indeed looking at a Greek-style depression that’s summoned outside their doorsteps within a matter of months.

    If they are rational about this, they will -somehow- request an orderly Euro exit later in 2013. After all, if they are led into poverty, they can do that with their own currency in place (and might I add, although the circumstances are very different now, I used to admire Cyprus pound – It was usually stronger than its British counterpart!).

    They joined the EU -and the Euro- for political reasons, and now the tables have turned. I hope they realize the grim state of affairs and decide to get out of this mess as soon as possible – Before the Troika finds out that, sadly, the “program” needs to be “readjusted” with even more bucket-loads of economic pain thrown at them.

    Here’s to hoping, then.

  9. John says:

    They sacrificed money, rule of law, sovereignty, democracy, human rights, the future of the youth and now even the single market to safe the Euro.

    Not much left is there?

    1. Anonymous says:

      Hi John
      They have in facy sacrificed the single currency as there is bound to be a black market right now. If you were in Nicosia at what rate would you exchange a Cypriot Euro for a German or Dutc one? Not 1 for 1 thats for sure and there goes the single currency concept.

  10. forbin says:

    Hello Shaun,

    The Iceland solution is looking good but instead Cyprus gets ” lipstick onna pig ” treatment

    another one on “t’rack” ……..

    So in honesty – why is Cyprus bailing out its banks ? Does the Government really own them ?

    Or is it as I’ve mentioned before – they can’t afford the 100K for small investor payout ? so this looks like instead of your unstable life boat – more of “sieve” lifeboat!

    I think a Lehman “let them go ” would lead Cyprus to a quick exit , cheap Cyp Pound and atlast a cheap holiday place ( like it was before) and its industry able to recover .

    Christine L, isn’t she an escapee of the B’Ark ?

    Forbin

    1. Anonymous says:

      Hi Forbin

      I was going to refer to my unstable lifeboat today but the post was already lengthy. However it was on my mind and let me go to the heart of the beast the ECB. On the 29th of December the third tranche of its recapitalisation was paid. How did Cyprus make its payment when it is quite plain it does not have any money ? Let us hope it was not paid with ELA.

      I did ask the ECB on twitter about this but have received no reponse.

  11. steved says:

    No doubt they are lining up Spain and Portugal for a dose of this next – it really is safer to keep your money under your bed. By the time we wake up, an extreme political solution to this mess will appear on the horizon and by then it’ll be too late.

    1. Anonymous says:

      Hi Steved

      I spotted this the other day in a comment in the Daily Telegraph as follows.

      TheOtherTurnipTaliban

      “I always wondered why elderly people seemed to have such an odd proclivity towards hiding large amounts of cash about their property, in vases, on top of wardrobes and the like, well now I know.”
      Sort of sums it up does it not?

  12. Anonymous says:

    Well, you don’t like it but this is the template I am afraid for EZ.
    http://uk.reuters.com/article/2013/03/25/uk-eurogroup-cyprus-dijsselbloem-idUKBRE92O0IL20130325

    1. pavlaki says:

      Yes I read this and thought -‘If I had money in Spanish or Portuguese banks that are sitting on huge piles of debt, or shaky Greek banks then I would move it right now and I mean right now!’ This could not be a clearer message. I am surprised he has been that honest as it must lead to capital flight and exacerbate the problems that shaky banks face.

      1. Anonymous says:

        And French banks too – the French banks had lots of exposure to Greece.

    2. Justathought says:

      Hi Vassilis_101,
      Indeed “insecurity” for some countries ’population…

  13. pavlaki says:

    You just couldn’t make this stuff up. After all the back-pedalling over the comments that the Cyprus bail-in is the future MEP Gunnar Hokmark (who is involved in formulating new laws to cover Cyprus type situations) has come out and said that only E100k is protected and anything above that is up for grabs and that is what they are formulating!! What a lack of coordination and common policy!

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