Randomly Noted

Here’s another anecdote supportive of the truism that everything is relative:

Larry Summers, the outgoing director of the Obama administration’s National Economic Council, earlier this week was making the case that while far from ideal, the U.S. economy was making progress.

“You’ve got to like our hand” in the U.S. as compared with the struggles in much of Europe and in Japan, Summers said Monday evening at The Wall Street Journal’s CEO Council meeting in Washington.

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It may have seemed like the financial crisis is Europe had stabilized. Greece has been somewhat quiet. Portugal hasn’t quite boiled over the way some thought it would. But now all eyes are back on Ireland and they aren’t smiling. The government announced today that it would need to pump additional cash into its struggling banking system to an extent that its budget deficit could stretch to a third of its entire economy. No other country in the eurozone has a deficit that bad.

It all started with the Central Bank of Ireland announcing Thursday that the state-owned Anglo Irish Bank would need close to a EUR30 billion infusion. Although the government and the European Union have ruled out a Greece-like bailout, that certainly must be on the mind of some investors.

Ireland wasn’t the only European country in the news for its fiscal problems Thursday. Spain saw its credit rating downgraded one notch to Aa1 by Moody’s Investors Service Inc. The ratings agency cited the country’s weak growth prospects.

The Bank for International Settlements released its triennial survey on the foreign exchange markets last night  and among the mounds of all of the interesting numbers (interesting to those of us who care about forex) were some trends worth noting. For starters, spot trading was up nearly 50% – and that was driven by the traditional trading between banks but even more so by trading by hedge funds, pension funds and mutual funds, among those characterized as “other financial institutions.”

So, proprietary trading was in full force at the banks – which we know has been a profit center in recent quarters for some firms. And we continue to see the larger role played by institutions like hedge funds.

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If we think about the financial crisis as coming in two distinct waves, this second and current wave highlighted by sovereign debt issues finds politicians around the world much less concerned about upsetting markets.

When the credit crisis settled into the scariest part of its first phase (financial sector distress) in late 2008, you’ll recall the U.S. Congress first saw fit not to pass the so-called TARP legislation that set aside vast sums of money to save banks and other financial institutions.

The U.S. stock market promptly swooned and the politicians collectively rethought their position. TARP passed and despite significant criticism the aid did the trick of keeping  a credit squeeze and deep recession from turning into something worse.

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This Dow 10,000 thing is getting very old.

The U.S. stock market slid below 10,000 as measured by the Dow Jones Industrial Average yet again. Piercing that level on the upswing happened for the first time back in 1999. That’s right, 1999.

Call me an optimist, but we’ll eventually again head through and above 10,000. Maybe even today, as the stock market slightly recovers from its worst intra-day levels.

The issue is Europe. First was the worry whether certain European countries, Greece prominently among them, would be able to to continue to sell debt  and repay outstanding sovereign debt in full.

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I am handing the quote of the day award to German Chancellor Angela Merkel, who was quoted by Dow Jones Newswires as follows:

“Speculators are our adversaries. First the banks asked for help, and now they are speculating against governments’ debts … I find that perfidious.”

Being accused of perfidy is strong stuff. I looked it up in the online Merriam-Webster dictionary. Synonyms include treachery and faithlessness.

Perhaps sovereign debt shouldn’t be subject to pure bet-placing, as is sometimes now the case, but blaming speculators and banks for the sovereign debt mess centered in Greece, but threatening to break out beyond that country’s borders, is a bit much.

Greece’s problems, a reasonable reader of the news is likely to conclude, is more the making of the country’s past elected officials and to a degree many of its citizens. Fiscal figures were in the past fudged. Tax payments rates are exceedingly low. Some civil servants enjoy(ed) pay and retirement perks that strikes an American, at least, as outrageous and clearly not affordable.

There also are the innate issues with the structure of the common European currency, the Euro, which creates a monetary union but not a political one with teeth to prevent a member nation’s fiscal profligacy.

And the leadership of Europe didn’t do itself any favors by dithering before getting serious about a Greek bailout. Many believe a debt restructuring will still be needed.

There’s plenty of fiscal profligacy to go around, including in the United States and United Kingdom.

Sure it’s true, markets have no collective conscience, but yelling at speculators is to avoid more basic problems. Yes, markets can quickly make a company’s or even a state’s financial situation unstable. But only if there was some fundamental shakiness to start.

The bailout package for Greece has not stemmed the bleeding in global markets, but for Asia the declines in currencies and stocks may soon lure investors back in.

What we are seeing is Asia and the U.S. catching a cold from Europe, as violence grows in Greece over the planned austerity measures and as ratings agencies sound warnings on the fiscal health of others in the region, including Spain and Portugal.

Just as an example, Hong Kong’s share market has fallen three days in a row, losing 3.7% over that period, while the Taiwan dollar Wednesday fell to its lowest level against the greenback since April 9. Thursday, the Nikkei is down more than 3.0% and South Korea’s Kospi has shed 2.3%, with the Korean won around six-week lows against the U.S. dollar.

The declines in Asia, which have included a widening in credit default swaps in an otherwise encouraging environment for the region’s companies and debt, come as investors react to the latest woes in the euro-zone.

The contagion though for now is peripheral; it’s just the end result of a fading global mood for risk. Strip that away, and what do you find?

Asian banks have minimal exposure to European debt–certainly that from Greece, Spain and Portugal. It seems prudence continues to win the day. Asian banks and their economies came through the recent U.S.-induced financial crisis in relatively good shape precisely because they had steered clear of subordinated debt products and repackaged debt generally.

Asian governments have also–some more so than others–worked to overcome the frailties in their banking and financial systems that were exposed so violently when the Asian financial crisis hit more than a decade ago. That’s left systems in much stronger shape, and central banks much better armed with foreign exchange reserves.

The region’s economies have also been faster and more convincing in their recovery over the past six to 12 months. Many challenges remain, none the least from how and when to exit the large spending measures put in place during the crisis, and how and when to tighten monetary policy (as inflation starts to rise), but if there’s one place that offers any sort of sanctuary right now, it would be Asia.

The region needs Europe and the U.S. to keep buying its products, but intra-regional trade has taken up some of the slack, particularly from China.

Sounder economic fundamentals and a stronger banking system mean Asian markets may soon appear more attractive to investors in currencies and stocks (and also the better Asian credits), even if the Greek wobbles continue. It would take a lot more than what we’re currently seeing to suggest we’re heading anew for some sort of global banking or debt crisis.
That may mean the declines start to slow over the coming week as value appears.

In Berlin to try to secure Germany’s assent for a Greece bailout deal, IMF boss Dominique Strauss-Kahn said earlier today that we “shouldn’t believe too much in what rating agencies say.”

One has to agree – on a number of levels. Over the past decade, Moody’s, Standard & Poor’s and Fitch have proved time and again they can be fallible – and late – in identifying all manner of credit vulnerabilities.

Moreover, during the Greek crisis, the rating agencies have become prime actors rather than arbiters – issuing downgrades and decisions that principally shape markets’ direction (in a fairly brutal way) rather than enlighten and inform.

DSK may in fact hold rating agency industry in contempt. But today what he’s really trying to do is calm markets. The rating agency downgrades – of Greece, Portugal and Spain – over the past two days have pushed the euro down significantly and spurred stock market selloffs around the world.

Ask a child who broke a chair or drew on the walls or put cat food in shoes what happened, and they are liable to answer: “Dolly did it”.

Apparently dolly is also now to blame for what’s happening in Greece.

We have murmurings that Greece’s woes–the latest being the downgrade of its sovereign debt to junk by Standard & Poor’s amid worries about its financing risks and growth outlook–aren’t of its own making. It was the euro that did it.

Czech President Vaclav Klaus has been quoted in the German daily Frankfurter Allgemeine Zeitung as saying the real cause of Greece’s crisis lies in the euro and not the country’s economic policy. It is “the euro that causes this tragedy,” he’s cited as saying.

In a way it’s surprising that we haven’t heard more of this sooner. Greece’s problems, and the worries about others in the region, like Portugal and Spain, provide the perfect chance to hammer the euro-zone and the euro in particular.

Finance ministers in the euro-zone haven’t shied away in the past in complaining about the euro’s level. It’s either too strong, or too weak, but never just right. The European Central Bank has been much more relaxed about the euro’s level than individual countries, in part because its primary monetary policy objective is to maintain price stability; certainly it’s not indicated any inclination to intervene in the market to adjust the currency.

Finance ministers also tend to grumble about the difficulties of a unitary monetary policy system. Interest rates that suit one country may not suit another.

But that’s not what caused Greece to get into such a mess. Blaming the euro is like giving Greece a leave pass for all its silly mistakes.

Its problems came about in some measure at least because it fudged its fiscal position to gain entry to the euro-zone. That fudging continued after it joined, and allowed government officials for years to sweep the budgetary problems under the carpet and operate in an increasingly precarious position.

Greece ignored its own difficulties, no doubt hoping that if it closed its eyes it’d all magically disappear.

People can argue that an elevated euro hurt the country’s exports or that interest rates were too high (though the ECB has kept them low for some time), and this sorry episode has highlighted the issues of a union like the euro-zone where there is a one-size-fits-all currency and monetary policy, but the Greek tragedy is largely one of its own making.

(This earlier ran on Dow Jones Newswires as a Money Talks column)

For all the talk about new world orders, new blocs, new spheres of influence and such we are yet to see the Group of 20 flex much muscle, or the BRICs (Brazil, Russia, India and China) manage to stay on message.

 This while European Union members wrestle publicly with how to deal with Greece–particularly how much money to hand over.

Governments still prioritize their individual needs over collective decision-making, and some groupings are proving a particularly fractious bunch.

That means, noise aside, we are unlikely to witness a sea change shift from the U.S. as a central decision maker or the U.S. dollar as the main global currency, or a major change in the phrasing and nature of world trade agreements; we are likely to also see a fair amount of protectionism persist.

The weekend meetings in Washington DC of the World Bank, the International Monetary Fund, the G-20 plus the G-7 were a classic exercise in maintaining the status quo. Only last year everyone was talking about how the G-20 would soon supersede the G-7/G-8, especially given the growing influence of China among the pack of the stronger developing nations.

That had implications for all sorts of things in terms of the balance of power, from emerging-market nations’ ability to negotiate things like trade, to what sort of currency should be the world’s dominant medium of exchange.

China and India, et al, are emerging powers. They are gobbling up more of the world’s resources and playing a bigger role as well in global politics.

But why presume the “south” is any more of a united grouping than the “north”? Emerging market nations may be just that, but they don’t necessarily have a lot else in common. Grouping them together and saying they will have the same agenda on trade, currencies and monetary policy is ridiculous.

Countries will act together, but only up to a point. Unions look less solid when their individual interests may be put at greater risk. That’s true for the G-7, G-20, EU and BRICs alike.

Witness the comments from officials from India and Brazil in recent weeks along the lines that it wouldn’t be a bad thing if China allowed its currency to rise. Are we seeing a crack in the BRICs?

Witness the German Foreign Minister Guido Westerwelle reminding everyone on Sunday that his country is “not ready to write a blank check” for Greece, after Athens appealed for an E.U. and IMF bailout.

 
We all like to bang on about a new world financial order. In reality, any change will be slow and incremental. The U.S. (with its outsize influence on the IMF and World Bank) and its currency will be top dog for a while yet.