Greek Borrowing Costs and Potential Bailout

According to Reuters Greek borrowing costs hit a record high on Tuesday April 19, 2010. That day Greece sold 1.95 billion Euros worth of 3 month Treasury bills on Tuesday paying a high yield of 3.65 percent. Greece needs to be able to borrow 10 billion Euros in the month of May and may be needing assistance of up to 80 billion Euros in the next few years. This recent treasury auction has fueled speculation that perhaps as early as this week Greece will tap a 40-45 billion Euro aid package from, fellow EU member countries as well as the IMF, in order to finance its debt. This will undoubtedly have a drastic effect on the EU and the Euro. German Chancellor Angela Merkel will be put in a tight spot as she will have to face a public which is opposed to a bailout of Greece, while also making good on her promise to help provide aid to the ailing country. What will likely happen is that during negotiations on the final aid package Germany and other EU member states will try to push Greece off on the IMF hoping for increased IMF funding of the bailout. This approach also has its problems as it will show that the EU is unable to help itself and must rely on an outside body like the IMF that may impose strict austerity measures on Greece and possibly on other EU member states. This news comes as the IMF is proposing new taxes on banks and financial institutions in its member states. This reflects the high levels of borrowing and stimulus spending during the recent recession. Taxes on financial institutions will be put into a fund or simply placed in the IMF to provide for bank bailouts in the future, although the money raised will not necessarily be enough to fund widespread future bailouts. Increasing taxes on these institutions will also make them less competitive in the world market and could increase their chances of failing in the first place. A bailout of Greece will also set a precedent that might encourage other troubled EU states like Portugal and Spain to ask for EU and possibly IMF assistance. An increase in the amount of bailouts for EU member states will take a drastic toll on the Euro and could lead to dynamic and fundamental shifts in the Euro-Zone.

Singapore Currency Revaluation

According to Reuters on Wednesday April 14,2010 Singapore revalued it’s currency sending it’s dollar to a 20-month high. This move was taken after data was revealed showing that Singapore’ economy had expanded an unprecedented 32.1 percent on a seasonally adjusted annualized basis for the first quarter. This jump in GDP was stronger than expected and is the highest rate since records began in 1975. Singapore also raised its inflation expectations for 2010 to 3.5 percent. The expected rise in inflation and the large jump in GDP are what caused Singapore to allow its currency to rise; Singapore uses its currency instead of interest rates to manage its economy. This move is very important because it reflects increasing expectations that China will allow its currency to trade at a higher rate sometime in the near future. Countries like India, Australia, and Malaysia have all raised the value of their currencies as many Asian countries brace for rising global interest rates and a change in the valuation of major currencies like the Yuan. An increasingly valuable currency will put more purchasing power in the hands of Asian consumers possibly setting the stage for a shift in the economies of many of these countries from exported based to focusing more on domestic consumption, possibly improving the standard of living for many on the Asian continent; this will also make Asian exports more expensive as they will be faced with a less advantageous exchange rate, while also requiring higher production costs. If Asian currencies, and in particular the RNB, become more valuable there will be some important implications for the United States. Firstly prices of imports from Asian countries will rise meaning higher prices for traditionally low cost Asian goods. Also, as the Chinese and other countries purchase U.S. treasuries in order to keep their currencies artificially low a rise in the RNB or other Asian currencies could mean a large scale sell-off of U.S. treasuries. This will drive demand for U.S. treasuries and bonds down thus increasing borrowing costs for the U.S. which depends heavily on borrowing to finance its large budget deficit.

imports

According to the New York Times the Commerce Department’s monthly report on trade showed a 1.7 percent increase in imports. Exports barely rose, however they are at a high enough level to have caused the trade deficit to rise to 7.4 percent, despite the increase in imports. Much of the growth in imports came from consumer goods, this is seen by some analysts as a positive thing as it signals a rise in consumer spending. However it is important to note that this consumer spending is not backed by the creation of any goods within the U.S. economy this is why imports are subtracted from GDP numbers. While a rise in consumer spending may signal a rise in economic activity it is only helpful if it is backed by a rise in production, otherwise it becomes a drain on the economy as it subtracts from overall GDP figures; The fact that many analysts ignore this fact and continually focus on spending as the prime indicator of economic growth highlights the shortfalls of demand side economics. What most of these people do not realize is that supply is what creates demand and therefore drives our economy. If an individual wishes to purchase items by acquiring money that individual must first produce something that others will want to buy. If spending is not backed by production it signals a rise in debt levels and no real rise in economic performance.

Financial Regulatory Reform

According to the New York Times the debate continues on the issue of financial regulatory reform. Currently legislators are planning on creating a Consumer Protection Agency to protect consumers against abusive terms on mortgages, credit card debt, and other financial products. This agency will either become a part of the Federal Reserve or will be created as an entirely new agency. While financial regulation is a good idea to keep banks and financial institutions from misrepresenting their assets and debts what is continually misunderstood by lawmakers is the cause of irresponsible lending practices. Government backing and sponsorship of many financial institutions has taken away any accountability or risk in trading and lending. With implicit or explicit government guarantees against failure banks and other financial institutions are able to lend in extraordinarily risky ways without the risk of failure causing them to over leverage and lend to people who have little chance of repaying their loans. Increased regulation is not the answer to making banks resistant to risky lending and trading practices, the re-introduction of risk into these practices is. What the government needs to do is threefold, firstly we must stop bailing out banks and other financial institutions this has caused a dangerous precedent wherein banks can attempt to maximize profits by making risky loan decisions and then when the loans are defaulted on they are bailed out by the taxpayer. If the bank is threatened with closure and the executives threatened with a loss of their livelihoods they will be much more responsible in deciding who to loan to. We need to abolish the FDIC, most people understand the FDIC as an entity that protects consumers from bank failures but what it is really doing is protecting the banks from failure. Bank deposits are essentially loans to the bank and by guaranteeing the repayment of these loans the government is allowing banks to again make risky investment decisions with little risk. If banks were not guaranteed by the government consumers would be encouraged to shop around much more and only deposit their money in banks with sound lending practices. Finally, we need to stop guaranteeing loans via Fanny Mae and Freddie Mac. The reasons for this are explained in more detail in my blog on Fannie and Freddie which can be found further down on this page. To conclude, as with many other things that are wrong with the American economy today, we do not need to introduce new government regulation we need to reintroduce market forces to our economy and hold people accountable for their actions.

new posts

Hello everyone,
I have been travelling in Europe for the past week or so but I will be back in the States by tomorrow and I will be writing plenty of new posts once i have returned. I have had a lot of thoughts brewing in my head while over here and I will hopefully have some interesting things for you all to read come Tuesday or Wednesday until then cheers.