Central Perk: Mish's Global Economic Trend Analysis

luni, 12 noiembrie 2012

Mish's Global Economic Trend Analysis

Greece Allegedly Gets Time, Not Money; Mish Says Time Is Money

Posted: 12 Nov 2012 02:37 PM PST

After forcing Greece into more austerity measures, the next tranche of emergency loans to Greece (most of which will ultimately do a round trip back to Brussels) is now delayed because the path Greece is on is still not sustainable.

Greece still requires additional funding of around €32 billion. Germany has said no and the ECB has said no.

Please consider Greece to get more time but no immediate aid.

Euro zone governments will not agree to disburse more money to debt-ravaged Greece on Monday, despite the country approving a tough 2013 budget, because there is not yet a consensus on how to make its debts sustainable into the next decade.

Finance ministers gathered in Brussels should, however, give Athens two more years to make the budget deficit cuts demanded of it, a concession that will require funding of around 32 billion euros, according to a draft document prepared for the meeting.

The Greek parliament passed an austerity budget for 2013 late on Sunday and a structural reform package last Wednesday, meeting the conditions for the release of the next tranche of 31.5 billion euros of emergency loans from the euro zone.

But officials said the money would not be released since ministers are waiting for the European Commission, the IMF and the European Central Bank, together known as the troika, to present their 'debt sustainability analysis'.

A compliance report by the troika calculated that if ministers agree to give Greece two more years to meet its targets, extra funding of around 15 billion euros would be needed up to 2014 and another 17.6 billion for 2015/16 -- amounting to a 32.6 billion euros funding hole to be filled.

Discussion on how to close that gap will be top of the ministers' agenda on Monday.

Officials hope granting Greece two more years to meet its goals will allow the economy to start growing again, otherwise it would never produce enough for the country to repay its debt.

A target was set in March for Greece to achieve a primary surplus of 4.5 percent of GDP in 2014 and while there is no final decision yet, officials say it is likely to be moved to 2016 because of delays with reforms and a deeper than expected recession.

The two extra years would also mean that the targeted Greek debt-to-GDP ratio, would be shifted to 2022, officials said.

Time is Money

One amusing thing about this ridiculous result is that time is clearly money. By giving Greece more time, Greece needs to come up with another €32.6 billion.

One way or another, creditors will have to take another haircut.

No amount of hoping, wishful thinking, or delays can change one simple fact: Virtually none of these loans will be paid back. The Troika may as well shift the date to the 12th of never as to 2022.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

New Loans and Money Supply in China "Lower Than Expected"; Hopes of China Soft Landing Too High

Posted: 12 Nov 2012 09:39 AM PST

The Chinese service sector expanded last month causing many to believe the worst news regarding China was over. I think it has barely started.

Damping the Pollyanna view comes news China New Yuan Loans, Money Supply Lower Than Expected in October

The value of loans issued by banks in China in October was less than expected, whereas the amount of money in the banking system grew at a slower pace, which suggest the authorities may be reining in liquidity toward the end of the year.

Chinese financial institutions issued a lower-than-expected 505.2 billion yuan ($80.83 billion) worth of new yuan loans in October, data from the central bank showed Monday.

October's new-loan tally was down from CNY623.2 billion in September and also below the median CNY590 billion of new lending forecast by 11 economists polled earlier by the Dow Jones Newswires.

China's broadest measure of money supply, M2, was up 14.1% at the end of October compared with a year earlier, lower than the 14.8% rise at the end of September, and below the median 14.5% increase forecast by economists.

Societe Generale economist Yao Wei said October's total new-loan tally shows that the People's Bank of China appears to be zeroing in on the CNY8.5 trillion lending target that many analysts and economists believe the central bank has set for the year.

Given the recent signs of stabilizing economic growth, it is unlikely that Beijing will further loosen its monetary policy in the coming months, said HSBC economist Ma Xiaoping.

Lending in a Command Economy vs. Lending in US

I see no reason to change my long-held belief that surprises in China will generally be to the downside, and probably severely so.

I say that even though there is one huge difference in bank lending between China and the US in terms of the government coaxing banks to lend.

When the Chinese Central Bank suggests banks should lend, they do. In the US money piles up as excess reserves if banks are reluctant to lend (as they are now).

US banks lend, on two conditions, both of which need to be true.

Banks are not capital impaired
Banks believe they have credit-worthy borrowers.

For a discussion please see Economist Fired for Expressing Opinions on Max Keiser Show; Errors in Observation.

Hopes of China Soft Landing Too High

In spite of command-economy lending prospects, hopes of a "soft landing" in China are misguided. China is far too dependent on housing, infrastructure, and State-Owned-Enterprises (SOEs).

Infrastructure Malinvestment

China is home to the world's largest shopping mall and it sits empty. For a discussion and video, please see How Will China Handle The Yuan?

Also recall that China is home to numerous vacant cities. For a discussion, please see World's Biggest Property Bubble: China's Ghost Cities Revisited; 64 Million Vacant Properties

The Video of Ghost Cities is a must see eye-opener for those overly bullish on China.

Either now or later China will pay the price, and the sooner the better.

China needs to rebalance, and will rebalance. Propping up the economy with more infrastructure projects and easy money will only cause the imbalances to grow larger. A regime change in China is underway, and the new regime will have to address the issue.

Economist Michael Pettis describes the setup perfectly in The Dating Game: Michael Pettis Challenges The Economist to a Bet on China

Implications

For implications on the upcoming China slowdown, please see

Two of the world's foremost experts on China(Michael Pettis and Jim Chanos) will be speakers at my economic conference in Sonoma, California on April 5, 2013.

For details please see Wine Country Conference April 5, 2013 or click on the image below.