October 17, 2011
Get ready for a tense week—yes, another one. If Europeans meet their own deadline by the end of next weekend, when a summit of European Union leaders is to convene in Brussels, we will see Europe’s proposed solution to its debt and economic problems given some much-awaited substance. Today, the markets are reflecting disappointment with the lack of a plan and anxiety about what will come next.
This isn’t any longer a crisis limited to the E.U.’s weak periphery—Greece, Spain, Portugal, Ireland, and Italy. Neither can we look at it as one that has spread via exposed banks only as far as the core of the E.U.: France, Germany, and other North European nations. The Eurozone crisis has gone global. Witness the efforts last weekend of the Group of 20 nations, which include strong emerging powers such as Brazil and China, to help get Europe back on its feet via the International Monetary Fund. Their worry: Another round of recession is about to hit one of their most important markets.
Of the flood of data streaming out of Europe and elsewhere these days, the most interesting statistic was buried in China’s monthly report of its trade figures. They were not brilliant. It’s plain that China is in for a slowdown, but so far it looks as if Beijing can manage a “soft landing.” Command economies are good at managing such things.
The mainland’s overall export growth slowed dramatically enough on a year-to-year basis, from almost 25 percent in August to 17 percent. But here’s the kicker: Export growth to Europe dropped by more than half, from 22 percent (year-to-year) in August to just under 10 percent in September.
Now we know why China announced last week that the government, via Cental Hunjin, the domestic branch of its sovereign wealth fund, has begun to raise its stakes in four Chinese banks: The stocks rallied, but by all appearances Beijing is bracing for a spate of bad loans as exports and GDP both slow down. And the banks involved—the Bank of China, China Construction Bank, the Agricultural Bank of China, and the Industrial and Commercial Bank of China—are among the biggest of blue-chip names on the mainland. It would be as if the U.S. Treasury suddenly revealed that it was taking stakes in Bank of America and JPMorgan Chase.
Over the weekend, Britain, the U.S., and other industrial nations appear to have blocked any G-20 plan for the strong emerging economies to go to Europe’s aid by boosting the IMF’s lending capacity—giving it a so-called “bigger bazooka” via an increase in funding contributions. Washington argued that the fund already has enough money to do its job, but the move looked primarily political: The nations that have enjoyed primary power within the IMF since its creation in the 1940s are not quite ready to cede influence to newcomers such as the BRICS (Brazil, Russia, India, China, and South Africa).
The emerging solution among European officials now appears to center on increasing the funds available to the European Financial Stability Facility, the EFSF, which acts as an emergency lending agency. Some European leaders have been calling for the facility to get a boost in funds -- now €750 billion – for months. A bare minimum of twice that is widely considered necessary for the EFSF to become effective in the current environment.
The European Banking Authority also proposes to require banks to increase their reserve ratios -- the amount of money in reserve relative to what banks have in their lending portfolios -- from 6 percent to 9 percent. Equally, they want banks to revalue their holdings of sovereign debt according to their current worth, a procedure known as “mark to market.” Both of these proposals generated stiff resistance from banks as soon as they were announced.
Adding to the fun, the rating agencies have been having a field day with downgrades across Europe. Last Thursday, Standard & Poor’s downgraded Spain’s debt from AA to AA–, while Fitch’ downgraded Italy’s from AA– to A+. A day later S & P and Fitch downgraded four major European banks between them: BNP Paribas, Société Générale, Deutsche Bank, and Barclays.
Next week’s E.U. summit, it’s almost needless to say under these circumstances, will come not a second too soon. The problem is no longer limited to the debt crises of Greece and other European nations; the larger question is whether Europe can avoid a second dip in the pond of recession. Unemployment in the worst of the crisis nations runs above 20 percent—it’s at 10 percent for the E.U. as a whole—and austerity measures have slowed economic activity to a crawl. This is now affecting the core economies, too, given their dependence on business orders from the rest of the Continent.
It’s the threat of recession that worries the BRICS, especially China, because Europe is an important export market. The E.U., after all accounts for about a fifth of global economic output. The IMF was wrong, in this columnist’s view, to block the emerging nations’ proposal to assist the Europeans. This is everybody’s economic crisis now, and all hands should have a part in resolving it.