A.E-P continues to warn of a mounting monetary crisis in Europe. The
day of doom is continually postponed but only to make doomsday more
profound when it comes!
The second article has Norman Lamont spelling out what will happen
with Brown’s reckless ‘borrow and spend’ plan. It’s not pleasant
reading
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TELEGRAPH Business News 31.10.08
1. TRADERS WARN OF ITALIAN ICEBERG
Italian bond weakest since lira as Europe crisis deepens
Investor flight from Italian bonds have pushed the yields on the
country's debt to the highest level since the days of lira, raising
concerns over Rome's ability to finance its budget deficit as a
repayment falls due next year.
By Ambrose Evans-Pritchard
The interest spread between Italian 10-year bonds and German Bunds
has reached 108 basis points, the highest since the launch of the
euro. Traders say it is nearing levels that risk setting off a an
unstable chain reaction.
In effect, Italy now has to pay 1.08pc more than Germany to entice
pension funds and other investors to buy its state debt. It is
unclear whether this is a temporary spike cause by a lack of
liquidity in the bond markets, or whether it reflects concerns over
the state of Italian finances.
Italy's public debt is the third largest in the world after the US
and Japan. At 107pc of GDP, it is the highest of any major economy in
the eurozone and almost double the 60pc limit stipulated by the EU's
Maastricht treaty.
Morgan Stanley calculates that Rome needs to roll over €198bn next
year as a clutch of maturities comes due. This compares with €173bn
for Germany, €135bn for France, and €57bn for Spain. Four EU states
have had to cancel bond auctions this month due to a buyers' strike.
"The outflows from Italian bonds have been relentless over the last
year," said Simon Derrick, currency chief at the Bank of New York
Mellon. "It has reversed all the inflows since 2003 and the intensity
does reflect significant concerns about the level of public debt."
Risk consultants Stratfor warned week that Unicredit has exposure of
$130bn in central Europe and the Balkans, while Intesa has lent $50bn
to the region.
Silvio Berlusconi, Italy's premier, insists that Italian banks are in
fine health and have largely avoided investments in US toxic assets,
but Italy's financial stability committee has held three sessions
over the last two weeks to discuss banking tensions.
Italy's financial daily Il Sole reported that the central bank is
mulling moves to inject capital into the banks. It described a "sharp
exchange" between Mario Draghi, the bank's governor, and finance
minister Giulio Tremonti, who denies that there is a problem. The
Italian cabinet is meeting tomorrow to discuss details of a state-
rescue package.
On the currency markets, the euro plummeted by six cents against the
dollar today after the EU's eurozone confidence index crashed to a 15-
year low.
"The message to the European Central Bank is that it must cut, cut,
and cut again," said Julian Callow, Europe economist at Barclays
Capital.
"The ECB clearly made an error by raising rates to 4.25pc in July,
but the banking crisis over recent weeks has brought it home to them
how serious this is. We expect them to cut by half a point next
Thursday, and go down to 2.25pc by next summer," he said.
In Eastern Europe, the brief respite following Hungary's $25bn rescue
package from the IMF was already giving way to fresh angst. Romania
was forced to deny persistent rumours that it was seeking an
emergency loan from the fund.
The country's prime minister, Calin Popescu Tariceanu, may have
inadvertently fuelled fears when he told local TV that the global
economy was sinking like the Titanic. "On the lower levels, people
are in water up to their necks, while on the upper floors the music
still plays on, just as it did in the film. And those people
listening to the music, not knowing that the Titanic has hit an
iceberg, that's us here in Romania. That's just what we're like," he
said.
Meanwhile, Poland's central bank was in talks with the Swiss
authorities and the ECB for a Swiss franc swap accord to relieve
intense strains in the credit markets. Heavy use of foreign loans for
mortgages and business debt has led to a sudden squeeze as the zloty
crumbles, falling 21pc against the franc since August.
A report by JP Morgan said Poland was in worse shape than Hungary,
citing concerns that the country's banks and companies will have to
pay back $96bn in foreign currencies next year. Poland's foreign
reserves are just $59bn.
Polish officials vehemently disputed the claims.
==============
day of doom is continually postponed but only to make doomsday more
profound when it comes!
The second article has Norman Lamont spelling out what will happen
with Brown’s reckless ‘borrow and spend’ plan. It’s not pleasant
reading
xxxxxxxxxxxx cs
===========================
TELEGRAPH Business News 31.10.08
1. TRADERS WARN OF ITALIAN ICEBERG
Italian bond weakest since lira as Europe crisis deepens
Investor flight from Italian bonds have pushed the yields on the
country's debt to the highest level since the days of lira, raising
concerns over Rome's ability to finance its budget deficit as a
repayment falls due next year.
By Ambrose Evans-Pritchard
The interest spread between Italian 10-year bonds and German Bunds
has reached 108 basis points, the highest since the launch of the
euro. Traders say it is nearing levels that risk setting off a an
unstable chain reaction.
In effect, Italy now has to pay 1.08pc more than Germany to entice
pension funds and other investors to buy its state debt. It is
unclear whether this is a temporary spike cause by a lack of
liquidity in the bond markets, or whether it reflects concerns over
the state of Italian finances.
Italy's public debt is the third largest in the world after the US
and Japan. At 107pc of GDP, it is the highest of any major economy in
the eurozone and almost double the 60pc limit stipulated by the EU's
Maastricht treaty.
Morgan Stanley calculates that Rome needs to roll over €198bn next
year as a clutch of maturities comes due. This compares with €173bn
for Germany, €135bn for France, and €57bn for Spain. Four EU states
have had to cancel bond auctions this month due to a buyers' strike.
"The outflows from Italian bonds have been relentless over the last
year," said Simon Derrick, currency chief at the Bank of New York
Mellon. "It has reversed all the inflows since 2003 and the intensity
does reflect significant concerns about the level of public debt."
Risk consultants Stratfor warned week that Unicredit has exposure of
$130bn in central Europe and the Balkans, while Intesa has lent $50bn
to the region.
Silvio Berlusconi, Italy's premier, insists that Italian banks are in
fine health and have largely avoided investments in US toxic assets,
but Italy's financial stability committee has held three sessions
over the last two weeks to discuss banking tensions.
Italy's financial daily Il Sole reported that the central bank is
mulling moves to inject capital into the banks. It described a "sharp
exchange" between Mario Draghi, the bank's governor, and finance
minister Giulio Tremonti, who denies that there is a problem. The
Italian cabinet is meeting tomorrow to discuss details of a state-
rescue package.
On the currency markets, the euro plummeted by six cents against the
dollar today after the EU's eurozone confidence index crashed to a 15-
year low.
"The message to the European Central Bank is that it must cut, cut,
and cut again," said Julian Callow, Europe economist at Barclays
Capital.
"The ECB clearly made an error by raising rates to 4.25pc in July,
but the banking crisis over recent weeks has brought it home to them
how serious this is. We expect them to cut by half a point next
Thursday, and go down to 2.25pc by next summer," he said.
In Eastern Europe, the brief respite following Hungary's $25bn rescue
package from the IMF was already giving way to fresh angst. Romania
was forced to deny persistent rumours that it was seeking an
emergency loan from the fund.
The country's prime minister, Calin Popescu Tariceanu, may have
inadvertently fuelled fears when he told local TV that the global
economy was sinking like the Titanic. "On the lower levels, people
are in water up to their necks, while on the upper floors the music
still plays on, just as it did in the film. And those people
listening to the music, not knowing that the Titanic has hit an
iceberg, that's us here in Romania. That's just what we're like," he
said.
Meanwhile, Poland's central bank was in talks with the Swiss
authorities and the ECB for a Swiss franc swap accord to relieve
intense strains in the credit markets. Heavy use of foreign loans for
mortgages and business debt has led to a sudden squeeze as the zloty
crumbles, falling 21pc against the franc since August.
A report by JP Morgan said Poland was in worse shape than Hungary,
citing concerns that the country's banks and companies will have to
pay back $96bn in foreign currencies next year. Poland's foreign
reserves are just $59bn.
Polish officials vehemently disputed the claims.
==============
AND
2. Labour will be out of power for a generation
Norman Lamont says Japan shows us that borrowing is not the answer
By Norman Lamont
Lord Keynes, the great economist, is the prime example of an
intellectual who has had a massive impact on practical affairs. Many
people who have never read Keynes, and understand him even less, cite
him, including Alistair Darling and Gordon Brown.
Keynes supported deficit financing as an answer to a depression in
which the economy was no longer self-correcting and interest rates
were ineffective. Recently, a number of commentators have advocated a
“Keynesian” solution of vastly increased government spending to
counter a possible recession.
There is an understandable fear that this slowdown is different from
previous ones. It is. We have had the most serious banking crisis
since the 1930s. But the key difference between now and the 1930s is
that, this time, the banks, wisely and correctly, have not been
allowed to fail. Liquidity has been lent to banks on a massive scale.
Few people are forecasting that we will face 20 per cent unemployment
as in the 1930s.
So do we really need a full-blown , public works “Keynesian”
solution? It is an approach with great dangers.
Gordon Brown’s talk of borrowing £100 billion may be nothing more
than an attempt to cover up the mess in the Government’s finances and
to pretend that what is out of control was carefully planned.
However, it is reasonable to argue that, in a recession, borrowing
should be allowed to rise to accommodate the costs of that recession,
such as increased unemployment benefit or lower tax revenues. To
offset these costs by cutting public spending would be to drive the
economy further into recession.
When I was Chancellor in the early 1990s recession, we started with a
stronger position in the public finances than today. Annual borrowing
was lower and debt had been repaid. But in another sense, we were at
a disadvantage. Because of the Exchange Rate Mechanism, we could not
stimulate the economy through lower interest rates or a lower
exchange rate. In that situation, a modest version of “Keynesianism”
seemed reasonable and we allowed borrowing to expand to absorb the
cost of the recession.
I learnt to my cost how swiftly public finances can crumble, and how
what at first seemed like a cyclical deficit turned into a
structural, permanent one.
By 1993, the deficit reached £50 billion and was clearly
unsustainable. The day of reckoning duly came and spending had to be
cut and taxes sharply increased, which was highly embarrassing for a
tax-cutting government. Although the Budget of 1993 was the right
budget, it was deeply unpopular and the chief beneficiary was Labour,
which inherited a massively strong economy that took it a decade to
destroy.
The lessons of all the postwar recessions are that deficits can
balloon with alarming speed. No one should forget that increased
borrowing has to be paid for. Far better than trying to spend one’s
way out is to cut interest rates, and to take advantage of the lower
exchange rate. That remains a far more effective way of stimulating
the economy. Today, with imported inflation falling, there should be
scope to cut rates. Of course, rates may not act as quickly to
stimulate the economy when there is such a large overhang of debt. If
there are liquidity problems in the banking system, that is an
argument for the Bank of England to supply more temporary liquidity,
not to embark on a public works programme.
The Government is proposing a high-risk approach. It took the country
into a possible recession with the highest level of annual borrowing
of any major country. Before the impact of the slowdown on public
finances becomes clear, it has decided to swell the deficit further:
irresponsibility to the point of recklessness.
Before the Government adopts full-blown Keynesian policies, it should
examine their effect on Japan after the bursting of its “property
bubble”. Between 1991 and 1998, Japan spent 100 trillion yen on new
railway lines and other public works. Little good did it do. Its
economy stagnated. Since 1991, Japan’s government debt as a
proportion of GDP rose from 64 per cent of GDP in 1991 to 171 per
cent this year. Japan is in a debt trap it can’t escape.
Gordon Brown’s policies would take Britain down the Japanese route —
with one important difference. Japan runs large trade surpluses and
can fund its borrowing from domestic savers. The British Government
depends on international capital markets to finance its borrowing.
Deficits and excessive borrowing may not have mattered when the world
was awash with money.
That has changed. Confidence is all.
Today’s bust was inevitable. But recovery will follow. The economy
adjusts. Prices fall, buyers come back into the market, confidence
slowly returns. It is mistaken government action that turns
recessions into depressions .
Adding higher government borrowing to private sector borrowing does
not improve the performance of the economy. If consumption has grown
too fast, increasing government spending is the equivalent of driving
through a red light.
Gordon Brown is like a gambler on a losing streak, doubling up by
spending. More huge tax increases lie ahead. Because he has already
exhausted the scope for stealth taxes, his policies mean we could see
VAT raised to 20 per cent or the basic rate of income tax heading
back towards 30p. One thing we can be sure of: it will be horrible.
But once the consequences of Gordon Brown’s fiscal management are
plain, it will take a generation before the voters trust Labour again.
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