Two big issues have been the rage of financial news during the weekend. First, the Chinese Central Bank lowered its reserve requirements by 50 BASIS POINTS in what is being termed an effort to engineer a “soft landing” and prevent a drastic fall in GDP. This is my first laugh as the raises in the reserves during the last 18 months did little to slow the economy. Besides, if the Chinese Politburo wants to install pro growth policies it has control of the credit creating mechanism. As the markets are looking for anything that sustains the recent global equity rally, why not the Chinese reserve ratio?
More important news out of China is word that the Japanese and Chinese are uniting on a package to aid the IMF‘s need for more funding. The U.S. is usually Japan’s comrade on IMF decisions but it seems that the two largest non-domestic holders of U.S. Treasuries are cooperating to be able to help the Europeans through the IMF.
This is certainly a sign that the U.S. control over the IMF is waning and the politics of international institutional finance are in the midst of a major change. Say goodbye to the atavistic remains of 19th century colonialism. The Japanese will be able to find all sorts of investments with the newly created liquidity.
The second LAUGH, of course, emanates from Europe and it has two parts. The main holdout to the Greeks getting their funding was the idea of whether or not Greece was going to be able to get its 2020 debt level down to 120% of GDP. The IMF has calculated that based on all the Greek’s austerity efforts, the DEBT/GDP level would only be 129% versus the obligatory 120%. In an Ambrose Evans-Pritchard piece, “Germany Bows to Global Pressure and Signals Greek Rescue Deal,” Pritchard cites German Finance Minister Schaeuble that there is wiggle room to be at 123% rather than the IMF‘s hard 120% DEBT/GDP ratio.
This is so ridiculous that the Greek deal is hanging in balance on a 2020 forecast. These wunderkinds haven’t come close to projecting any of the budgets for the last two years and now they are concerned about 2020. AND YET THE MARKETS REACT TO THIS NONSENSE! To further confirm the failure of European projections, Peter Spiegel has an article in tomorrow’s Financial Times, “Greece Indignation Threatens to Spread,” as the concept of FISCAL UNION is being seen as anti-democratic.
The EU‘s top economic official, OLLIE REHN, has met pushback from some of the peripheries for the way his fiscal policy actions are undermining the domestic democratic institutions. Mr. Rehn threatens severe penalties for those nations that cannot meet the budget deficit numbers to which various nations have agreed so that they could attain funding through any member of the TROIKA(IMF, ECB, EU). The nations in question are beginning to fear that Brussels will demand that TECHNOCRATS seize the reins of government so as to put the necessary policies in place. (Italy and Greece are the recent examples.)
Peter Spiegel goes on to report: “This week, Mr. Rehn is due to present economic projection confirming that Spain is WILDLY OFF ITS AGREED DEFICIT-REDUCTION TRACK. (EMPHASIS MINE) The new centre-right government has already said the Spanish public deficit soared to 8% of national output in 2011-far worse than its predecessor had predicted. This year Spain is supposed to get to 4.4%. That is not going to happen.”
The impact of ADVERSE FEEDBACK LOOPS resulting from severe austerity budgets is nothing to LAUGH AT, BUT WORRYING ABOUT 2020′s deficit projections is so ludicrous that laughter becomes the best medicine. The market likes the end result that Greece is getting its money so now it will be on to Portugal to test Herr Schauble and his promise that Germany will stand by Portugal and meet its needs. This week will be a test of the resolve of many Europeans and so the 2/10 yield curves will be significant indicators of the markets genuine outlook.