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What would Krugman do? Borrow and stimulate....................
NEW YORK (CNNMoney) -- European markets sold off Wednesday as Italian bond yields hit record highs, raising worries of just how deep the crisis would spread.
http://money.cnn.com/2011/11/09/mark...le+Feedfetcher
NEWS ANALYSIS
Austerity Plan Might Not Work for Spain and Italy
By LANDON THOMAS Jr.
Published: August 8, 2011
http://www.nytimes.com/2011/08/09/bu...-analysis.html
ONCE again Europe’s leadership has been forced to put up billions in cash to halt the spread of contagion to the Continent’s weaker economies, this time in the form of a potentially vast purchase of Italian and Spanish government bonds by the European Central Bank. And once again the condition for rescue is more austerity.
Gianluca Colla/Bloomberg News
A shopping mall in Milan. Italy, like Spain, has already made strides to balance its budget.
But this time there is a difference. Unlike Greece, Portugal and Ireland — the patients previously forced into the austerity cure — Italy and Spain have already made their own substantial strides toward cutting their deficits.
Some economists warn that forcing further cuts could push their teetering economies over the edge. And unlike Greece or Portugal, they are so big that any default might shatter the euro union for good.
“Italy has done everything asked of it — it has cut left, right and center,” said Yanis Varoufakis, an economist in Athens who has written widely on the euro zone’s travails. “But if you keep cutting like this you start to cut into muscle, which affects your growth and your tax revenues.”
Spain and Italy already have some of the lowest growth rates in the euro zone, with both expected to be below 1 percent this year. And official projections show little improvement coming next year.
Italy has been on target to bring its deficit down to 3.9 percent of gross domestic product this year. And, under further pressure from Germany and the European Central Bank last week, the prime minister, Silvio Berlusconi, said the cutting would be sped up with the aim of Italy’s balancing its budget by 2013.
Italy also currently leads the Western industrial world with a budget that is actually in surplus, to the tune of 2 percent of G.D.P., when taking account of its financial position apart from interest on existing debt. This so-called primary budget status is generally considered the most useful way of measuring a government’s financial health.
Spain is set to pare its deficit to 6 percent of economic output, down from 9 percent. Yet Spain, too, is under pressure from its European partners to cut even more.
Neither Italy nor Spain has been rewarded for the economic pain their austerity has already imposed, as jittery foreign and local bond investors have rushed for the exits.
Since the end of last year, for example, Deutsche Bank has slashed its net exposure to Italy — once seen as a more or less risk-free borrower — to 996 million euros, down from 8 billion euros.
Until the European Central Bank’s decision over the weekend to buy Italian and Spanish bonds pushed bond yields down sharply, their market rates were above 6 percent, generally considered the upper limit for managing a sustainable debt burden. Monday, on news of the central bank’s buying plan, the yield on Italy’s 10-year bond slipped to 5.27 percent and Spain’s to 5.12 percent in late-afternoon trading in New York.
Bond investors have had their reasons to be wary of Italy and Spain, of course.
Italy’s overall debt level of 126 percent of G.D.P. is one of the highest in the world. And its failure to emerge from a decade-long slump suggests it will be harder than ever for Rome to service that debt.
Spain, meanwhile, is struggling to recover from a devastating real estate bust. And worries persist over the vulnerability of Spanish banks.
But, as Stephen King, chief economist at HSBC, notes, Italy is one of the few nations whose debt level has remained essentially unchanged since the introduction of the euro in 1999. The other nation with a similar pattern is Spain, with a debt level that actually decreased — down to 66 percent of G.D.P., from 69 percent.
“On the basis of fiscal fundamentals,” Mr. King said, “Italy is one of the best in class.”
By comparison, Greece’s debt exploded to 147 percent of G.D.P. from 101 percent over the same period. The overall debt of France and Germany has also risen significantly. And outside the euro zone, Britain and the United States have also experienced even sharper increases in government debt since 1999.
Britain is now undergoing a program of self-imposed austerity. But while British growth figures continue to be revised downward — to a bit above 1 percent for this year — investors have not abandoned the country’s bonds which, at 2.6 percent, trade close to those of Germany.
That is largely because Britain controls its own currency and because investors, so far, still think the government is committed to following though on its budget cuts.
In the case of Italy and Spain, it is not clear that the austerity medicine prescribed by the European Central Bank and its president, Jean-Claude Trichet, will actually make things better.
Those with a sense of history say Mr. Trichet’s outlook is colored by his experience trying to defend an earlier regime of fixed exchange rates — back in the 1990s when European rates were tied to the Deutsche mark, the precursor to today’s monetary union.
Mr. Trichet, then a top French treasury official, forcefully advocated a tough austerity regime in which France pushed to keep its inflation rate below that of Germany, to keep French labor costs on par with Germany’s.
Other countries, including Britain and Italy, opted for an easier route by leaving the exchange rate mechanism and devaluing their currencies.
Asked back then what might keep the currency peg experiment from collapsing, Mr. Trichet gave an answer in many ways similar to Europe’s current position on how the euro system will survive its current trial. The anchor of the system, Mr. Trichet said at the time, was the system itself.
The currency peg collapsed anyway.
Europe is now far more committed — politically, financially and economically — to maintaining the integrity of the euro than it was in preserving the 1990s Deutsche mark exchange rate mechanism.
The open question is, will enforced austerity be any more a successful remedy now than it was back then?
Barton Biggs: Austerity is a Big Mistake
http://finance.yahoo.com/blogs/break...124734101.html
With half of Europe already committed to some degree of budgetary belt tightening and our own so-called ''Super Committee" mulling ways to slice a trillion dollars out of the federal budget, you'd think the argument for austerity would be a slamdunk, but nothing could be further from the truth.
"In general, I think austerity is a big mistake," says Barton Biggs, founder and managing partner of New York-based hedge fund Traxis Partners. Biggs supports a stimulate and stabilize approach first, followed by austerity once things have leveled off. To do otherwise, he argues in the attached clip, risks triggering a global recession again, which he says would be "catastrophic for the world" as well as social order as we know it.
With the benefit of 50 years of global investment experience, Biggs thinks the time has come to embrace what he calls the "grand bargain." It's a sweeping package of social policy reform that would raise the U.S. retirement age to 70, boost taxes on the top 1% of earners, and cut military spending in half to no more than 2.5% of GDP.
While he dismisses the idea of a flat tax as ''appealing but crazy,'' Biggs wants to see FDR-like infrastructure spending programs. He calls this "important stimulus" to help get our economy growing, and also to offset the impact of expiring Bush-era Federal programs.
For a man who spent 50 years on Wall Street --the majority of them at Morgan Stanley and more recently running a hedge fund-- he is extremely bearish on the outlook for fees and compensation in the financial services sector.
"I've advised my grandchildren to be engineers," Biggs announces. "If they want to get rich that's the place to do it, not fussing around with the stock market."
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