Credit Writedowns » Edward Hugh

Global Manufacturing Steadies as She Goes, or Does She?

Edward Hugh — Mon, 06 Feb 2012 21:00:02 +0000

The year got off on a much better foot than might have been expected, at least as far as global manufacturing is concerned. So the fall in global manufacturing has flattened out, even though the bounce back has more of a dead cat look about it than anything else. As usual in recent months the report was very much a mixed bag

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A Month In Spain That Didn’t Shake The World

Edward Hugh — Mon, 23 Jan 2012 13:00:00 +0000

Spain’s economic problems are very grave. The country is facing a decade long depression, and if enough young qualified people leave during this period then the country could enter a negative dynamic from which it will never properly recover. At the outset (2007) I and others argued for a 20% internal devaluation to shift resources over to the export sector. This did not happen, and virtually no one is interested in the idea. The main priorities are still reducing the deficit, and restructuring the financial sector without injecting any significant quantity of public money. Both these policies are contractionary in their impact. In addition the proposed labour market reform is timid, and won’t act quickly enough to stop the rot on the growth front

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Monti, The Full Version

Edward Hugh — Wed, 18 Jan 2012 13:00:22 +0000

Fortunately the ECB has deep pockets, and as I argue in this post, these will probably suffice to keep short term bond yields down to acceptable levels, and help the banks fund themselves and recapitalise. What the ECB’s LTRO’s won’t do is get new credit moving (one significant part of the initiative involves banks in the troubled periphery economies not having to write down the asset side too much too quickly, so there will be little room for “creative destruction”)

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The Massendowngrade Effect

Edward Hugh — Mon, 16 Jan 2012 15:30:09 +0000

Perhaps the main point to take to heart from the events of the last week is the way the recent ECB liquidity measures have apparently been able to stabilise the debt crisis, at least for the time being, even while it is not clear that they will have the same success stabilising the deterioration in the respective real economies

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Playing Chicken And Rooster With Hungary

Edward Hugh — Fri, 13 Jan 2012 00:15:15 +0000

Tension surrounding the application of a series of so-called “unorthodox policies” by Hungary’s Fidesz government has certainly been rising in recent days. While Washington has been reasonably quiet as government emissary Tamas Fellegi meets with top IMF officials, Brussels has seen a veritable avalanche of official statements and policy initiatives. Despite constant rumours that an agreement with the IMF is near, I find it pretty implausible that any deal can be reached without some kind of EU assent. At the present time this assent is unlikely to be forthcoming, and indeed the ”ante” has been pushed up and up

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From Here To Eternity, Hungarian Style

Edward Hugh — Sun, 08 Jan 2012 18:00:28 +0000

It was in Hungary that the new orthodoxy of relying on “non-Keynesian” effects related to expectations and credibility was formally announced and put to work. However, private consumption, unfortunately, has notably failed to rise. Perhaps there will be more than a little historic irony involved in Hungary being the country where the whole experiment eventually went badly wrong, although I doubt the Hungarians themselves will se it that way

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The Rain In Spain Falls Mainly On The Journalists, It Seems

Edward Hugh — Mon, 02 Jan 2012 12:30:49 +0000

Nothing in Spain is exactly as it appears to be, and that few of the arguments politicians and so called “experts” advance are entirely innocent. Most “information” circulating in Spain is highly politicised. Really “independent” analysts are virtually unknown

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Italy Braces Itself For The Full Monti

Edward Hugh — Mon, 26 Dec 2011 18:39:01 +0000

The bottom line is that Italy is both too big to fail and too big to be bailed out, which is why it is still hanging dangerously in limbo-land. Since, as I argue in this article, some sort of restructuring or other is well nigh inevitable in the Italian case, the sooner Europe’s leaders work up a credible plan on how to achieve this, the better. Otherwise it will not only be Italy’s citizens who are subjected to the Full Monti, Europe’s leaders may also find themselves with their credibility stripped naked

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Is Finland Really A Closet Member Of The Eurozone Periphery?

Edward Hugh — Mon, 19 Dec 2011 02:36:20 +0000

The country’s debt dynamics are far from unsustainable at this point, but given the weakening in the country’s export performance and the steady unwinding of the housing boom we can now anticipate I would expect growth to be weaker than either the EU or the IMF are currently anticipating, and pressure on the country to increase fiscal spending to maintain expectations to rise, with the implication that pressure on the Finnish spread over 10 year German bunds will continue, as the country risks drifting off from being part of the core towards the growing periphery, at least in the eyes of investors

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A Deep Seated Hostility Towards European Construction?

Edward Hugh — Mon, 12 Dec 2011 13:30:00 +0000

The British decision to veto the proposed new EU treaty is not surprisingly provoking an avalanche of commentary this weekend. Among journalists, at least, there seems to be a consensus that David Cameron committed some kind of major diplomatic blunder. Possibly this is so, but given the difficulties presented by having to take this agreement forward outside the formal structure of the EU, it is hard to not reach the conclusion that both Angela Merkel and Nicolas Sarkozy have been guilty if not of a similar blunder, then at least a major error of judgment

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Last Days Of Pompeii?

Edward Hugh — Mon, 28 Nov 2011 20:30:00 +0000

What is becoming clearer to almost everyone is that this is now no longer simply a Euro periphery sovereign debt crisis. It has become a full blown crisis of confidence in the Euro itself

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How Would You React To The News Your Local Central Bank Just Went Bust?

Edward Hugh — Sun, 20 Nov 2011 23:30:00 +0000

Alarm signals have been going off over the last week, not only due to the surge in the yields on Spanish and Italian debt but also due to evidence that the infection (contagion) is now spreading to what was previously considered to be the core (France, Austria) with the evident danger that more countries will lose their triple A rating. This has put the spotlight on the ECB as an institution, but the bank is reluctant to adopt the role of ultimate guarantor. This is not principally due to the so called “inflation fear” – demand driven inflation is extremely unlikely in the Euro Area in the near term – but rather due to a fear of accumulating sizeable losses in the event that large quantities of bonds are purchased and then countries like Italy and Spain have to restructure their debt. Naturally some argue that a central bank can simply accept losses, since the bank doesn’t necessarily need recapitalisation and could be allowed to carry on regardless of the red ink on the bottom line. I am not very convinced by this argument. I think my fears are shared by the Bundesbank, and my intuition is that they are not at all keen to run the experiment just to see what actually happened

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Ireland: Is austerity enough or will we see haircuts?

Edward Hugh — Mon, 12 Sep 2011 12:54:02 +0000

It is high time politicians in Berlin to started to recognise that fiscal austerity is not the be all and end all of the policy issues they now face. Ireland is applying fiscal austerity, but this alone may well not be enough. A better distribution of the pain needs to be found. As the IMF itself notes in its latest staff report: ”there is a strong sense that burden-sharing between taxpayers and creditors for the cost of supporting the banks has been unfair”

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High Noon Approaching for Greece?

Edward Hugh — Fri, 09 Sep 2011 12:45:00 +0000

The Greek tragedy in several acts would appear to be approaching a climactic moment. The warnings coming out of Berlin all week have been hard to ignore: “Greece either puts up or shoves off” would seem to be the blunt message being offered

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Life On the PMI Cold Comfort Farm

Edward Hugh — Thu, 25 Aug 2011 20:40:13 +0000

As the heat wave which has been hanging over Southern Europe for the last couple of weeks steadily eases off there is little sign that any of the warm air which is dissipating is reaching the chilled motors of the European and Chinese economies. The results of this months PMI readings are at best more of the same, and at worst show continuing deterioration. While current conditions stabilised in some areas, new orders, and especially new export orders often hit new post-recovery lows. There is every likelihood that the final August global readings will be much more of the same

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Eastern European Growth – Coming Rapidly Off The Boil?

Edward Hugh — Mon, 22 Aug 2011 17:00:00 +0000

The latest round of EU GDP data, brought to light a reality which many who have been closely following the economies of Eastern Europe already suspected: that the heavily export dependent economies in the region would almost inevitably be dragged down by the rapid slowdown in Europe’s principal economic motor, the German economy

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Policymakers fear the Italian penalty shot

Edward Hugh — Thu, 18 Aug 2011 10:30:00 +0000

The Italian debt markets are a lot calmer this week than they were the week before last because the level of Italian bond yields is now more or less completely guaranteed by the European Central Bank (the ECB). However, Italy’s problem is not simply a short term liquidity one (funding a deficit), it is a long term solvency one (servicing an enormous pile of debt and growing at the same time). While the country has long maintained a primary surplus, the weight of the debt has drifted steadily onwards and upwards. The conundrum: With low growth you need inflation to be able to make the books balance, but this excess inflation makes the country’s competitiveness problem steadily worse. If you implement the reforms needed to make the economy more competitive then you don’t get the inflation, and if you take away the deficit in the meantime then you simply don’t get growth. The numbers simply don’t add up

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Break the euro zone in two

Edward Hugh — Mon, 15 Aug 2011 20:00:32 +0000

It is also worth stressing that this solution is far from perfect. We do not live in an ideal world. It is only one possible way of breaking the vicious circle into which the Euro Area countries have now fallen. It is one possible way, and as far as I can see the only viable and realistic one

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Estonia is also part of the Eurozone periphery

Edward Hugh — Mon, 15 Aug 2011 14:10:26 +0000

It is far from clear that the current level of Estonian CDS prices risk in in any more satisfactory way than they did at the height of the crisis, since membership of the Eurozone has brought with it both positives and negatives. The 0.28% contribution of the country to any future EFSF bailouts may not seem like a very big deal, but in comparison to Estonian GDP the sums involved may well be far from trivial. The country does not have, and is not likely to have, either a fiscal deficit or a sovereign debt problem, nor does it have a home grown banking system which might need bailing out. The risk to Estonia comes from elsewhere, from its association with Ireland, Spain, Greece, Portugal and Italy. Depending on how far the core EU countries are willing to finance debt and absence of growth in those countries the Eurozone’s future is far from clear

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Could There Really Be A Recession Risk In Germany?

Edward Hugh — Thu, 04 Aug 2011 14:00:01 +0000

In Germany movements in GDP follow movements in the rate of expansion of exports. Let’s not get into why that is for the moment (think Germany’s particular demography), and just consider the possibility, despite all the talk over the years of Germany finally “decoupling”, that it can’t. Export dependence could well be the key explanation for why the performance of the German economy is so “extreme” and so volatile, with quarters of record growth being witnessed just before the onset of substantial recessions, recessions which often register record falls in output only to be followed by massive recoveries

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Spain’s High Risk Election Process

Edward Hugh — Thu, 04 Aug 2011 12:30:41 +0000

As Mr Zapatero put it on Saturday, when he announced the date of Spain’s general election, the decision “is in the country’s interest” since from now on there will be certainty, and “certainty is stability”. While it is quite possible that almost all of Spain’s politicians share this sentiment, and welcome the bringing forward of the election date, they may very well be the only ones to do so. Certainty is undoubtedly a strong positive, but when the only thing about your country which people can be certain of is the election date, then maybe you won’t have gained much on balance

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A Hungarian Waltz On The Wild Side

Edward Hugh — Sun, 31 Jul 2011 20:35:58 +0000

The Hungarian government’s much publicised unorthodox plans to cut the country’s public debt level has been attracting a lot of attention of late, both from the media and from the rating agencies. Some observers have been quite positively impressed. Others, however, continue to have their doubts

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Double Dip in the Euro Zone Periphery

Edward Hugh — Mon, 25 Jul 2011 16:39:02 +0000

As Europe’s leaders struggle to convince markets that their Greek debt problem-resolution-proposals are actually viable, and will really do the trick, last week’s flash PMI readings seem to have attracted rather less attention than they might. Nonetheless, the fact of the matter is that it is steadily becoming clearer that the current slowdown in Eurozone economic growth is turning into something more than just another one of those pesky “soft patches”

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Smoke On Europe’s Eastern Horizon?

Edward Hugh — Sun, 10 Jul 2011 21:00:22 +0000

Edward Hugh writes of an unstable combination which make the countries in Eastern Europe highly vulnerable to both a renewed deterioration in sentiment and an external economic slowdown of the sort we could see following a disorderly Greek default, and yet markets in general seems to be shrugging off the risk as almost non existent

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Can Italy Grow Its Way Out of Debt?

Edward Hugh — Tue, 05 Jul 2011 08:30:16 +0000

What follows is simply a follow-up note to my earlier (Elephant in The Euro Room) piece on Italy. The decision by S&P to put Italian sovereign debt on negative outlook, and the subsequent announcement by Moody’s that it was considering a downgrade has been widely commented on by analysts, and it might be interesting to take a look at some of the views that have been advanced on either side of the argument

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Red Lights Flashing For Eurozone Growth

Edward Hugh — Sun, 26 Jun 2011 17:00:56 +0000

The June Flash PMI reports, which were out on Thursday, do not make for agreeable reading, in the sense that while the French and German economies both continued to expand during the month, their rate of expansion, and in particular in the leading manufacturing sector, seems to have dropped sharply, and for the second month running. In contrast, the economies on the Eurozone periphery moved closer to outright contraction. All in all the survey results only add to concerns about the global recovery which came into focus after the May PMI results

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Nine Reasons Why Spain Is Not Different

Edward Hugh — Sun, 26 Jun 2011 14:20:22 +0000

I have decided to single Klaus Baader out for special treatment here because he conveniently brings together, in a clear and succinct fashion, a number of arguments which are widely accepted and used by both analysts and policy makers about Spain. Unfortunately the fact that arguments are widely held does not make them valid, or in anything other than the most trivial conventialist sense “true”

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India’s Economy Hits What Has To Be A Very Welcome “Soft Patch”

Edward Hugh — Sun, 26 Jun 2011 13:00:22 +0000

India is still an emerging economy, one which has made great strides forward in recent years. And despite many difficulties India has remained a democracy since independence. It is a country where human rights are by and large respected, and where institutional quality is gradually improving. As I am suggesting here, the central bank is becoming more and more independent. Corruption is still a BIG problem, but eventually this has solutions. At the same time India is a country of individuals, of creativity and strong entrepreneurial spriit and, to close with a professional bias: India produces economists of extraordinary quality

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To QE3 Or Not To QE3, That Is The Question

Edward Hugh — Tue, 07 Jun 2011 07:00:25 +0000

So what are the realistic chances of another bout of QE right now? Well according to Robin Harding they are pretty slim, and it is hard not to agree with him (due to the anticipated voter backlash in the US), yet among professional analysts opinion seems a bit more divided. According to PNB Paribas’s Mehernosh Engineer, Vivek Tawadey, and Rajeev Shah, QE3 may not be totally excluded, and, they argue, risk assets are already starting to price in the possibility that Bernanke decides to go for it

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BELLS in Hell that Don’t Go Ting-a-Ling-a-Ling

Edward Hugh — Thu, 02 Jun 2011 19:00:00 +0000

The BELLS are a group of four countries (Bulgaria, Estonia, Latvia and Lithuania) who in their wisdom decided to adopt and then stick “come hell or high water” to a currency peg with to Euro. Thus was opened one of the more interesting and lively chapters in modern macroeconomic debate

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Italy is the elephant in the euro room, not Spain

Edward Hugh — Mon, 23 May 2011 20:00:58 +0000

Looking through the latest round of EU GDP data, one thing is becoming increasingly obvious: when it comes to future monetary policy decisions at the ECB, and to exactly how many more interest rate hikes we are going to see, then the performance of the Italian economy is going to be critical.

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Greece: Last Exit To Nowhere?

Edward Hugh — Sun, 15 May 2011 23:30:05 +0000

If the strongest argument against going back to the Drachma always was that this would imply default, now that default is coming, why not allow Greece to devalue? As Krugman says, the issue isn’t whether Greece would openly decide to exit the euro, the issue is what happens if the markets force this solution on Greek and European leaders? Given the programme isn’t working, the likelihood of this event occurring in the next 2 or 3 years is far from being negligible, so why not be proactive rather than always being reactive? What matters is whether Greece becomes Turkey (oh what a historical irony) or Argentina. If the powers that be can agree on an ordered restructuring of Greek debt, and a controlled exit from the Eurozone, then Greece has some possibilities of turning the situation round. If exit is forced on Greece in order to escape the clutches of both the EU and the IMF then the move will be, as I suggest in my title, simply the last exit to nowhere

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The Great Greek And Spanish GDP Mystery – One Hypothesis

Edward Hugh — Sun, 15 May 2011 13:00:37 +0000

Many an economic eyebrow must have been raised last Friday when Europe’s first quarter GDP data was released, and people discovered that the Greek economy had suddenly surged forward, rising by 0.8% over the level it had attained in the last three months of 2010 (or at a 3.2% annual rate, or faster than the US). Since almost everyone with knowledge of the situation is forecasting a further contraction in the economy this year, the result may have been thought to be a surprising one

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Is There A Eurozone Credit Cycle?

Edward Hugh — Mon, 09 May 2011 19:30:00 +0000

One of the key premises underpinning the establishment of the Euro as a common currency to be shared by a number of individual national states rather than one single nation was the central idea that the several economies of the participating countries would eventually converge to one common typology. That is to say, even if the individual nations would not be dissolved into one single superstate, then the idea was that the difficulty this could obviously create would be overcome by the generation of a number of different, but to all-important-economic-effects identical economies, each one a replica (in miniature or "a lo grande") of the other. Absent this, it is hard to see how people could have convinced themselves that having a single currency and a single monetary policy could possibly work in the longer term

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Japan’s Economy Fights For Air

Edward Hugh — Tue, 03 May 2011 12:45:33 +0000

With the arrival of the first real Japanese data since the Tsunami struck the immensity of the tragedy which Japan is passing through is only now gradually becoming apparent. Exports were down by a seasonally adjusted 7.7% in March over February, while imports were only fell by a much more modest 1.4%, with the inevitable consequence that the trade surplus which forms the lifeline for Japan’s fragile economy shrank sharply. In particular car production was badly hit, with output at Toyota plunging 62.7% during the month, while Nissan reported a drop of 52.4% and Honda put the shrinkage in its Japanese domestic production at 62.9% adding that output would be at 50 percent of its former projections until at least the end of June. In fact March output across the whole of Japanese industry fell at a record monthly pace of 15.3%, while household spending declined at the record annual rate of 8.5%

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