Sovereign debt bubble thread

[Jacob]

Since China is a semi-closed society, it's difficult to know what's going on there.

I don't think it's particularly hard to know what's going on there.

There's little transparency when it comes to high level political decision making, and the endemic corruption makes for significant risk in various scenarios, but the fundamental situation and factors are - political rhetoric aside - pretty well understood.

It's not as bad as the Soviet Union was, but it's still not transparent.  In my mind China is in a state of flux.  10 years from now it could be like Russia in the 1990's, the same as it is today, or even a thriving new Democracy.  I suspect that some kind of drastic political change will occur in China in the next few decades.

Yeah, China is in a state of flux, and yeah I expect we'll see something significant there in the next few decades. The economic growth is unlikely to last forever and the realities of modern communication has permanently changed the way the party has to deal with the people. The excesses of a corrupt and arrogant ruling class can no longer be swept under the rug as effectively as earlier. (Most) people don't speak out publicly about it, but almost everyone knows and it registers. Eventually, something will have to give.

The last 20 years have shown us that one party states like China don't have the longest shelf life.  Ideally, China will follow Taiwan's example in gradually removing one party rule and slowly evolve into a real (if idiosyncratic), democracy.  I don't know how likely that is.  Deng strengthened China immensely by resigning.  It wasn't Washingtonian in scope, but it was an excellent example.  I'm of the opinion that Deng should be regarded as the greatest Chinese statesman of the 20th century.  Though that's not to difficult considering the piss poor leadership China has seen the 20th century.

Yeah, Deng deserves a lot of credit I think; not just for resigning but also for initiating the economic reforms that has led China away from central planning and towards the current prosperity.

[Razgovory]

I don't think it's particularly hard to know what's going on there.

There's little transparency when it comes to high level political decision making, and the endemic corruption makes for significant risk in various scenarios, but the fundamental situation and factors are - political rhetoric aside - pretty well understood.

Are they?  The Soviets were not honest about their rate of growth.  It would surprise me if the Chinese didn't fudge their numbers a bit.  Most Westerners who have visited China know it for it's affluent coastal areas.  Few visit the slums or the poorer places in the inlands.  That's how things like slave labor in brick factories or lead in children's toys, go unnoticed.

Obviously China is growing, but as government owned business are still a cornerstone of the economy there is significant opacity.  And government officials a strong incentive to be dishonest.

[MadImmortalMan]

Belarus Imploding

Belarus Struggles With Meat Shortage as Russians Exploit Currency Plunge

By Aliaksandr Kudrytski - Aug 31, 2011 3:09 AM PT


Belarus's supermarkets are running out of meat as Russians take advantage of a currency crisis that a devaluation and the world's highest borrowing costs have failed to stem.

"All meat has gone to Russia," Alexander Andreyevich, an 82-year-old former tractor-plant worker, said Aug. 25 in Minsk, the capital. "My relatives near the Russian border called me a few days ago and said the shops are empty."

Belarus is grappling with a balance-of-payments crisis that forced a 36 percent devaluation of its ruble in May. It may need to raise $12 billion by 2013 through state-asset sales and international bailout loans to stave off economic collapse, Moody's Investors Service said Aug. 23.

The crisis has sparked protests as Belarusians vent their anger at President Alexander Lukashenko, dubbed Europe's last dictator by the administration of former U.S. President George W. Bush. While the authorities have sought to control food costs to quell public discontent, buyers from neighboring Russia have pushed meat prices higher.

"Private stall owners simply go and buy meat from state- owned vendors and sell it a couple of steps away for a hefty profit," Deputy Agriculture and Food Minister Vasily Pavlovsky told reporters in Minsk Aug. 24.

The government banned individuals in June from taking basic consumer goods such as home appliances, food and gasoline out of the country. Russians, buoyed by the removal of border checkpoints July 1 as part of a customs union, have circumvented the restrictions.
Free Float

Belarus will allow the ruble to float from mid-September and will remove restrictions on depositors seeking to exchange local currency for dollars and euros, Lukashenko said yesterday.

"The Belarusian ruble's exchange rate will be determined by supply and demand, as with any other commodity," he told the government and central bank, according to the Belta news service. "We will not support the exchange rate artificially."

Lukashenko pledged Aug. 25 to curb rising prices and increase pensions and wages to keep pace with inflation. Demonstrations after a 30 percent increase in gasoline prices on June 7 resulted in arrests and prompted the Belarusian leader to reverse the decision the following day.

Even so, Anton Dolgovechny, head of the Economy Ministry's macroeconomic forecasting department, announced the next day that state spending would be cut by about $2 billion in 2011, Belta reported.
Deficit, Reserves

Belarus's current-account deficit reached 16 percent of gross domestic product in 2010 after the government raised public wages and pensions. Gold and foreign-exchange reserves fell 22 percent to $4.2 billion in the year to August under International Monetary Fund methodology as the central bank sought to support the ruble.

The bank has raised its refinancing rate by 16.5 percentage points since January, making borrowing costs the highest among 50 countries tracked by Bloomberg. The latest increase to 27 percent from 22 percent is effective Sept. 1, the bank said yesterday on its website.

Belarus was granted a $3 billion loan by the Russia-led Eurasian Economic Community in June. A bailout from the IMF may be blocked by the U.S. and European Union, which have imposed sanctions on Belarus over its human-rights record, Lukashenko said June 17.

State assets to be offered to replenish reserves include potash maker Belaruskali and the Beltransgaz gas pipeline operator.

The yield on Belarus's dollar bond due 2015 advanced 6 basis points to 14.167 percent today, compared with 7.69 percent on Jan. 13, according to data compiled by Bloomberg.
Health Spas

As well as meat, services are also attracting Russians, who make up one in two visitors at the 'Lode' spa 160 kilometers (100 miles) north of Minsk and prefer luxury suites, a representative of the resort, Natalya Varvantseva, said Aug. 26 by phone.

Many of them pay with Russian rubles or dollars, the scarcity of which has pushed black-market exchange rates far below the central bank's official 5,061 rubles per dollar.

The unofficial rate slipped to 9,900 by Aug. 25, according to a survey of companies offering foreign currency conducted by Infobank.by, a financial-news website. Prokopovi.ch, a service that matches buyers and sellers of foreign currency online, quoted 8,842 rubles per dollar yesterday.

The only legal way for citizens to obtain foreign currency is by waiting at licensed exchange booths, where queues often exceed a hundred and the names of people who have left their details on previous visits are called daily.
'Structural Reforms'

The ruble may depreciate as much as 25 percent against the dollar by the end of September before currency inflows from loans and state-asset sales allow it to recoup the "temporary" losses, Julia Tsepliaeva, head of research at BNP Paribas SA in Moscow, said by e-mail yesterday.

"Further structural reforms are still needed to get Belarus out of crisis mode and to ensure sustainable economic growth in the future," Alexei Moiseev and Dmitry Fedotkin, economists at VTB Capital in Moscow, said in an e-mailed note today. The economy may expand 1.5 percent in 2011 before shrinking 5.2 percent next year, VTB said Aug. 26.

[Neil]

That's a Russian problem.  Or rather not a problem, since the policy of the Russian empire is to loot and plunder their slave states.

[MadImmortalMan]

"Very few of us realise with conviction the intensely unusual,unstable, complicated, unreliable, temporary nature of theeconomic organisation by which Western Europe has lived for the last half century. We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly. On this sandy and false foundation we scheme for social improvement and dress our political platforms, pursue our animosities and particular ambitions, and feel ourselves with enough margin in hand to foster, not assuage, civil conflict in the European family."

John M. Keynes

Sometimes shit just keeps being true.

[jimmy olsen]

Russia should just reannex Belarus and get it over with.

[Razgovory]

Russia should just reannex Belarus and get it over with.

I wonder if they will do so openly if it looks like Lukashenko will be toppled.

[Zanza]

"Very few of us realise with conviction the intensely unusual,unstable, complicated, unreliable, temporary nature of theeconomic organisation by which Western Europe has lived for the last half century. We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly. On this sandy and false foundation we scheme for social improvement and dress our political platforms, pursue our animosities and particular ambitions, and feel ourselves with enough margin in hand to foster, not assuage, civil conflict in the European family."

John M. Keynes

Sometimes shit just keeps being true.

Damn, that's from 1920, no? I think I'll use that as my new signature on Paradox.

Hehe, I just found that the next sentence of Keynes is: "Moved by insane delusion and reckless self-regard, the German people overturned the foundations on which we all lived and built."
That's fitting some perceptions of the current situation too. 

[Zanza]

From the Financial Times:

September 5, 2011 10:06 pm

Hang on to your purse, Ms Merkel
By Gideon Rachman


"When she walks into the room, everybody falls silent. It's like the headmistress coming in." That, according to one senior politician, is the impact that Angela Merkel has when she enters the regular gatherings of conservative leaders from across Europe.

The chill spread by the German chancellor is easy to understand. Her colleagues know that the fate of the euro – and the European Union as a whole – now depends on decisions made by the German government. Many criticise Ms Merkel for lacking imagination, warmth and generosity – for being too slow and too cautious. The chancellor is even under attack from pro-Europeans back home. Helmut Kohl, her mentor and the man who took Germany into the euro, complained recently that he had no sense of "where Germany stands today, and where it is heading".

The general tenor of all this criticism is clear. Why won't Ms Merkel live up to her promise to do "whatever it takes" to save the euro? Why won't she finally get ahead of the crisis, by committing all of Germany's financial might to the project? Why can she not see that eurobonds – a pooling of credit risk across the EU – are the answer? Europe needs a leader and instead it has got a hausfrau.

But rather than lambasting the chancellor, the rest of Europe should be grateful that they have a calm and cautious leader in Berlin. It was bold visionaries such as Mr Kohl who created the euro in the first place – leaving future generations to sort out the subsequent mess.

There are (at least) five reasons why Ms Merkel is absolutely right to balk at some of the more dramatic courses of action that are being urged upon her.

First, the chancellor's critics often fail to acknowledge the real political and legal constraints that she is operating under. Tomorrow, the German constitutional court will rule on the legality of the proposals to increase the fund for bailing out debt-ridden members of the eurozone. Later this month, the German parliament will vote on the issue. It would be both arrogant and foolish for Ms Merkel to assume that she can simply win all these battles, when both German public opinion and many influential voices within the country are deeply opposed to further bail-outs. Similarly, any proposal to create eurobonds would require new EU treaties, which would be very hard to get ratified in Germany – let alone the rest of the eurozone. Those who are calling for ever bolder German actions, regardless of the legal and political difficulties, seem to have little respect for the country's democracy.

Second, saying that the German chancellor should do "whatever it takes" to save the euro, assumes that we know what it would take. Eurobonds are the latest panacea, recommended by many of the same people who assured us years ago that the euro would be a secure currency. Ms Merkel has no real idea whether they would work. But we do know that expanding the bail-out fund (as will almost certainly happen), or creating eurobonds, would mean piling more and more potential costs and liabilities on to the German taxpayer.

Third, it is not simply vulgar, tabloid prejudice to believe that if more money is funnelled to southern Europe, much of it will be wasted. In countries such as Greece and Italy, basic functions of the state – such as tax collection and the awarding of public contracts – are frequently corrupt. In the past, EU money has actually fostered corruption.

Fourth, the idea that Germany can automatically save the euro – if it summons the will and generosity – is based on an unjustified assumption of unlimited German economic strength. Take a look at the debt ratios across the EU, and you might notice that German debt at more than 83 per cent of gross domestic product is higher than that of France, Spain or Britain. At present, the markets have confidence in Germany. But that happy state of affairs cannot be counted on forever. Growth is slowing and the country's ageing population points to rising costs in the future. If Germany underwrites too much EU debt, the markets could easily change their view of the country.

Fifth, it is often said Ms Merkel fails to realise that saving the euro is profoundly in Germany's own interests. On one level, this is a truism. Of course a stable and prosperous Europe is in German interests. The question is whether the remedies being pressed on Ms Merkel would actually achieve this end, or simply create a worse crisis further down the road.

A slightly more sophisticated version of this argument holds that the German economy would suffer hugely if the euro broke up, because many German banks would go bankrupt or its currency would soar in value, making German exports uncompetitive. The banking problem is a real one. But it is possible that a one-off recapitalisation of German banks would be rather less costly than an open-ended commitment to the whole of southern Europe. The argument that German industry could not cope with a stronger currency also ignores the history of the postwar German economic miracle – which took place despite a steadily rising D-Mark.

The German chancellor clearly wants to support the single currency and the EU. Her good intentions cannot be doubted. But she would be foolish to endanger Germany's own economic and political stability, by endorsing whatever desperate plan is proposed to "save" the euro.

[Neil]

How anyone can think the Eurobond is a good idea is beyond me.  What happens when Greece, Italy and Spain outstrip Germany's ability to repay?

[Zanza]

You think bundling subprime loans and giving them an AAA rating could go wrong somehow?

[Neil]

You think bundling subprime loans and giving them an AAA rating could go wrong somehow?

The entire concept of subprime loans is wrong.  If you've committed credit sins or are poor, then you should not have access to credit.

[The Minsky Moment]

How anyone can think the Eurobond is a good idea is beyond me.  What happens when Greece, Italy and Spain outstrip Germany's ability to repay?

The same question can be posed in the absence of Eurobonds.

[Jacob]

Are they?  The Soviets were not honest about their rate of growth.  It would surprise me if the Chinese didn't fudge their numbers a bit.  Most Westerners who have visited China know it for it's affluent coastal areas.  Few visit the slums or the poorer places in the inlands.  That's how things like slave labor in brick factories or lead in children's toys, go unnoticed.

I'm not sure why you think it matters which parts of China Westerners have visited. The poverty and the corruption are no secrets to anyone, though of course local officials try to put a nice facade on it whenever they could be held responsible.

The fact that you, who've never been to China (in the affluent coastal areas or anywhere else) and who's not (I believe) any sort of expert on China or economics, can list the fundamental problems and challenges the Chinese are facing is a pretty good indication that those issues are well known.

Obviously China is growing, but as government owned business are still a cornerstone of the economy there is significant opacity.  And government officials a strong incentive to be dishonest.

No disagreement there at all. There's plenty of opacity, most of which comes down to fairly venal corruption, but the nature and distribution of the opacity is pretty well understood I think... even by some within the party. Zhu Rongji (the previous premier) said that for China to survive the corruption and cronyism must be rooted out, but if corruption and cronyism is rooted out, that would be the end of the Communist party.

[Razgovory]

I don't know if I can spot the fundamental problems with China.  I'm not the big anti-China guy on this board.  I just don't trust dictatorships that much.  Dictatorships are more opaque then democracies, and as such one must be a more skeptical of information that comes out of a dictatorship then a democracy.  If I'm not mistaken there are still closed areas in China, correct?  For the same reason I'm skeptical of growth in Russia right now.  Actually more skeptical of numbers coming out of Russia then I am China.