ECB slammed by Nobel economist as European slump deepens.By Ambrose Evans-Pritchard, International Business Editor Last Updated: 6:57am BST 27/08/2008 Almost the entire region of Western Europe, Scandinavia and the Baltics is on the cusp of fully fledged recession, raising fresh fears about the health of Europe's banking system. Germany's IFO confidence index of future business crashed in July to levels last seen in the post-unification bust of the early 1990s. Over the past three months the index has suffered the steepest decline since the 1973 oil shock. "Everything is coming to a head at the same time," said Julian Callow, Europe economist at Barclays Capital. "The euro's surge over the past two years has caught up. We've seen a hollowing out of the euro area's industrial sector, an oil shock, and tightening credit conditions, made worse by the European Central Bank's decision to raise rates in June," he said. Nobel economist Robert Solow said the ECB had made a bad mistake and was now moving far too slowly to stop the downturn engulfing the region. "I get the feeling that the mandate of the ECB is based on the notion that controlling inflation in a modern industrial economy is enough, with no further need for anything else. This not a view that is accepted any longer in economic circles. Central banks should not try to reverse oil supply shocks," he told The Daily Telegraph. Prof Solow, an expert on growth theory, questioned whether the eurozone is capable of responding to a crisis given the lack of a single economic government to co-ordinate policy. "You could say that every political entity gets the central bank it deserves," he said, speaking at a Riksbank gathering of Nobel laureates. The dramatic downturn in Europe's core economy appears to have taken the currency markets by surprise. The euro has plummeted by almost 10pc against the US dollar since early July, inflicting heavy losses on hedge funds with big "short" positions on the greenback. Denmark is already in a fully fledged recession and now appears to be sliding deeper into trouble. Danish industrial orders collapsed by 22pc in June compared to a month earlier, Eurostat revealed yesterday. The country suffered its own Northern Rock-style debacle on Monday when the central bank had to launch a rescue of Roskilde Bank after a run of withdrawals by depositors. The state is now guaranteeing $8bn (£4.3bn) of debts. It is the biggest bank rescue in Scandinavia since the financial crisis of the early 1990s. Nils Bernstein, the Danish central bank's governor, said the authorities were left with no choice once Roskilde, the country's eighth biggest bank, had lost the confidence of the capital markets and was unable to roll over loans following disastrous losses on the Danish property market. Attempts to find a private buyer had failed. Mr Bernstein said a collapse of the bank would have posed "a significant threat to financial stability in Denmark". Roskilde has, in effect, been nationalised, leaving the shareholders with nothing, in accordance with the strict tradition of Scandinavian bank rescues. "The presumption is that holders of capital have lost their money," he said, adding that the bank was "not fit to survive" after abusing the credit system to pursue breakneck growth without proper regard for social duty. Denmark's economy has been destabilised by its membership of the European Exchange Rate System (ERM), which forced it to import interest rates that were much too low for the country. The result was a wild credit boom that pushed household debt to 260pc of disposable income, the highest level in the world. This is worse than Britain (159pc) and America (135pc). The property boom has now turned to bust. House prices have fallen by 10.7pc over the past year in Copenhagen. The abruptness of the bank collapse in Roskilde - a sleepy town in central Denmark best known for its rock festival - is a reminder that Nordic lenders are heavily exposed to the downturn. Sweden's economy ground to a halt in the second quarter. There are now concerns that Swedish banks could face a squeeze as the Stockholm property market deflates and the losses mount on heavy exposure to the Baltic states. House prices in Latvia have fallen 28pc this year. The International Monetary Fund said that Swedbank dominates lending in Latvia and Estonia, where it has more clients than in its home base in Sweden, and it is the biggest lender in Lithuania. It warned that the Baltic operations of the Swedish banks "could cause a credit crunch in Sweden itself" if the funding dries up in the wholesale capital markets. Fitch Ratings warned yesterday that the Baltic trio of Latvia, Estonia and Lithuania face a high risk of a hard landing after years of blistering credit growth, mostly funded by foreign funds. It warned of a "risk of a loss of confidence in the Baltic currencies and their banking systems, triggering widespread conversion and withdrawal of deposits". Latvia's current account deficit is 18pc of GDP, and external financing needs have reached 158pc of reserves. Financing needs in Estonia are now 218pc of reserves. Danske Bank fears a severe crisis if these countries are forced to devalue. The property booms have been funded by euros and Swiss francs mortgages, creating a major exchange risk. Comments "So what is the outlook? I suspect, though, that the dollar will fall a good deal further. It is perfectly possible that further dollar weakness will take the euro up to $1.60, and the pound up to $2.20 - or beyond." Roger Bootle, Capital Economics, writing in DT 01/12/07 Dear Doctor Gloom. A major point that you conveniently fail to mention. The demise of Roskilde bank is mainly attributable to a combination of extremely poor management and greed leading to over-exposure to the speculative property market that we have witnessed in Denmark over the last 5 years. The single largest borrower has already been formally charged with large scale property fraud. The "sub prime" crisis has played little or no role in Roskilde Bank's collapse. There will be a tomorrow!! Denmark is NOT a member of the Euro, it is pegged to the Euro. It's only money - print some more... Readers should be thankful to Ambrose for printing the news truthfully unlike most others who put a spin to paint a rosy picture. People must be made aware that main stream economists like Pobert Solow are trained by the Banking Cartel to promote Fractional Reserve Banking. Steroids work for some time after which the patient stops responding to increased dosages. Inflation adjusted interest rates are already negative. Any further reduction will lead to hyperinflation of necessities but will not help assets. Professor Rogoff thinks 100 US banks a year will go bust, for the next three years. This is just the start. Time to buy systemic protection with gold? This is just the start of the second leg of the gold bull market, see: link Ahhh ..Ambrose Evans-Pritchard. After reading yet another article detailing the end of the world, I must fight the urge again to slit my wrists and lie down and wait to meet my maker. The fatalism of the man - we are mere pawns. Flotsam of life. A great inevitable financial steamroller is running over us all. You might not realise it yet but Ambrose can see it. Look there goes Spain, Iceland’s toast, Latvia's back to the stone age and Britain - well the best (the worst) is getting really close. Ambrose never fail to entertain. Picks up the juicy sky-is-falling pieces and arranges them for a dramatic effect. Way to go, Amby. After reading the heavy-duty serious stuff yours is truly relaxing. Looking forward to more of the surface scraping. 'Short' the trio currencies? |
Wednesday 27 August 2008
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