Today, Iceland that its President Olafur Ragnar Grimsson blocked the parliamentary bill to allow for the reimbursement of Dutch and British savers. The Prime Minister,Ms. Jóhanna Sigurðardóttir, said this will force the compensation issue to a referendum, as determined by Icelandic law. This has already caused tension between Iceland and other European nations but a NO on the referendum will call the question about sovereign default. When a sovereign parliament reaches an agreement to resolve international debt issues, but is rebuffed by a direct vote of its people, the whole notion of sovereign debt will be called into question. The world will watch as all types of pressures are brought to bear on the Icelandic democracy, giving us yet another stress point.
In yesterday’s Financial Times, there was a poignant opinion piece written by Lorenzo Bini Smaghi, an executive member of the European Central Bank. When a man of his stature publishes a piece in the popular press it is no small matter. The title, “Emerging Asia must loosen the grip of its exporters”, suggests that China must revalue its currency and halt the influence of its exporters in maintaining a mercantilist-oriented, weak currency policy. The Europeans are now replacing the U.S. as the most bellicose voice on the YUAN and openly warning China about the need to allow their currency to appreciate. Smaghi hammers home the point that these global imbalances cannot be allowed to be sustained and it is in China’s best interests for the domestic economy and consumer demand to displace the well-entrenched power of the exporters. Allowing the YUAN to rise would enrich Chinese consumers and help correct the global imbalances that he believes are causing great financial stress. The Europeans have never been shy about protectionist measures, so this is not to be quickly brushed aside. Smaghi sums up his article :
as a result, short-term goals may once again be allowed to override balanced and substantial economic policies.It is a well-known problem of political economy in Western Democracies.It no longer seems to be confined to them.
The warning to China is that the protectionist drums are beating and the sounds are emanating from very high places. Interestingly,a high-placed Chinese official expressed concern about the speculative inflows into the YUAN and how this is making it difficult to manage liquidity. Xing Ziqiang, a Beijing-based economist was quoted in a Bloomberg article that there could be a 25% increase in hot money inflows. If we take Premier Wen Jiabao at his word, when he said China will not bow to international pressure to revalue the YUAN, then at some point there will have to be some restrictive action to prevent the Chinese economy from overheating due to the huge amount of currency created to buy up all the DOLLARS. The Chinese can keep raising reserve requirements but at some point currency controls will enter the picture. We will probably see some type of Brazilian tax and duration program enacted. Prozac anyone?
And just when we have had enough, word comes from Japan that Finance Minister Fujii will step down due to exhaustion. He has been instrumental in passing the budget and is highly regarded by all politicos and bureaucrats in Japan. Prime Minister Hatoyama will miss this war-horse of Japanese politics and will possibly undermine the credibility the new administration is trying to develop. We will link you to a piece from Observing Japan which will lay out the domestic political implications. And we wonder why 2+2=5!
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