US doing better among worst
By Floyd Norris, The New York Times
In the fourth quarter of last year, the US economy shrank at a 4.1 per cent annual rate, the worst such performance in half a century.
If the economies and stock markets of the world were graded on a curve, the United States would be doing quite well.
In the fourth quarter of last year, the US economy shrank at a 4.1 per cent annual rate, the worst such performance in half a century. They are envious in Japan, where this week the comparable figure came in at negative 12.7 per cent - three times as bad.
Industrial production in the US is falling at the fastest rate in three decades. But the 10 per cent year-over-year plunge reported this week for January looks good in comparison with countries ranging from Germany, off almost 13 per cent in its most recently reported month, to South Korea, down about 21 per cent.
Even in the area of exploding mortgages, the US has done better than some countries, particularly in Eastern Europe. There it is possible now to owe twice what a house is worth - even if the house has not lost much of its value.
Grading on the curve, as any college student knows, requires that a certain proportion of high grades be given out, no matter how badly the class as a whole performs. If the best student in the class gets a few more than half the answers right on a difficult test, that student deserves an A.
The real world, alas, does not score success in that way.
Consider how much money you would have left if you had put $100 into the stocks in the leading market indexes of major countries at the end of 2007, less than 14 months ago. In the US, you would now have about $54. That fact - coupled with the reality that more Americans than ever are depending on the stock market to pay for their retirement - has severely depressed sentiment and spending. But it merits one of the top grades in this world. Among major markets, only Japan, at $59, has done better. In Britain, France, Spain and Germany, the figure would be about $45. In Italy, it would be $37. About a quarter of the money would still be there in countries like Ireland, Greece and Poland. Remember the BRIC countries, where growth possibilities seemed limitless not long ago? The stars there are Brazil and China, where about $46 or $47 remains. In India, the figure is $35, and in Russia it is $23. At least they have all done a lot better than Iceland, where the number is just $3 left.
All this failure, whether in markets or economies, is feeding upon itself. Imports and exports are falling nearly everywhere.
Eastern Europe in dire straits
Nowhere does the situation appear more dire now than in Eastern Europe. Many of those countries have been running large current-account deficits, just as the United States has been doing. But the United States still has the ability to borrow all the dollars it wants - in part because lenders know it can print more of them if it needs to. The Eastern Europeans have no such printing press, and those countries that can borrow show little interest in sharing the bounty.
“Emerging Europe appears to be suffering a ‘sudden stop’ in financing, which could cause the region’s economy to contract by 5 per cent to 10 per cent this year,” said Neil Shearing, an economist at Capital Economics in London. “Markets in Eastern Europe appear to be in meltdown.” He says the Baltic economies could shrink by 20 per cent this year.
The latest collapses are both a cause and a result of worries about the health of banks in the region, many of which are owned by West European banks. Some of those banks did a fine job of pushing ‘affordable’ mortgages that are turning out to be just the opposite, endangering both borrower and lender. The details differed from the subprime lending that was a major cause of the destruction of capital in the US banking system. There were no ‘Ninja’ - no income, no job or assets - loans that would produce exploding monthly payments within a couple of years.
Instead, the banks pushed mortgages denominated in foreign currencies - largely the euro and the Swiss franc - where interest rates were much lower than in the local currency markets. The risk was obvious. What if the local currency lost value rapidly? That is just what is happening. The Hungarian forint is down by about a quarter this year against the Swiss franc, and by more than half since last summer.
That means that someone who bought a house in Hungary last summer, financing it with a Swiss franc loan, now owes more than twice as many forints as were borrowed, and has a monthly payment that has increased by a similar amount.
By Floyd Norris, The New York Times
In the fourth quarter of last year, the US economy shrank at a 4.1 per cent annual rate, the worst such performance in half a century.
If the economies and stock markets of the world were graded on a curve, the United States would be doing quite well.
In the fourth quarter of last year, the US economy shrank at a 4.1 per cent annual rate, the worst such performance in half a century. They are envious in Japan, where this week the comparable figure came in at negative 12.7 per cent - three times as bad.
Industrial production in the US is falling at the fastest rate in three decades. But the 10 per cent year-over-year plunge reported this week for January looks good in comparison with countries ranging from Germany, off almost 13 per cent in its most recently reported month, to South Korea, down about 21 per cent.
Even in the area of exploding mortgages, the US has done better than some countries, particularly in Eastern Europe. There it is possible now to owe twice what a house is worth - even if the house has not lost much of its value.
Grading on the curve, as any college student knows, requires that a certain proportion of high grades be given out, no matter how badly the class as a whole performs. If the best student in the class gets a few more than half the answers right on a difficult test, that student deserves an A.
The real world, alas, does not score success in that way.
Consider how much money you would have left if you had put $100 into the stocks in the leading market indexes of major countries at the end of 2007, less than 14 months ago. In the US, you would now have about $54. That fact - coupled with the reality that more Americans than ever are depending on the stock market to pay for their retirement - has severely depressed sentiment and spending. But it merits one of the top grades in this world. Among major markets, only Japan, at $59, has done better. In Britain, France, Spain and Germany, the figure would be about $45. In Italy, it would be $37. About a quarter of the money would still be there in countries like Ireland, Greece and Poland. Remember the BRIC countries, where growth possibilities seemed limitless not long ago? The stars there are Brazil and China, where about $46 or $47 remains. In India, the figure is $35, and in Russia it is $23. At least they have all done a lot better than Iceland, where the number is just $3 left.
All this failure, whether in markets or economies, is feeding upon itself. Imports and exports are falling nearly everywhere.
Eastern Europe in dire straits
Nowhere does the situation appear more dire now than in Eastern Europe. Many of those countries have been running large current-account deficits, just as the United States has been doing. But the United States still has the ability to borrow all the dollars it wants - in part because lenders know it can print more of them if it needs to. The Eastern Europeans have no such printing press, and those countries that can borrow show little interest in sharing the bounty.
“Emerging Europe appears to be suffering a ‘sudden stop’ in financing, which could cause the region’s economy to contract by 5 per cent to 10 per cent this year,” said Neil Shearing, an economist at Capital Economics in London. “Markets in Eastern Europe appear to be in meltdown.” He says the Baltic economies could shrink by 20 per cent this year.
The latest collapses are both a cause and a result of worries about the health of banks in the region, many of which are owned by West European banks. Some of those banks did a fine job of pushing ‘affordable’ mortgages that are turning out to be just the opposite, endangering both borrower and lender. The details differed from the subprime lending that was a major cause of the destruction of capital in the US banking system. There were no ‘Ninja’ - no income, no job or assets - loans that would produce exploding monthly payments within a couple of years.
Instead, the banks pushed mortgages denominated in foreign currencies - largely the euro and the Swiss franc - where interest rates were much lower than in the local currency markets. The risk was obvious. What if the local currency lost value rapidly? That is just what is happening. The Hungarian forint is down by about a quarter this year against the Swiss franc, and by more than half since last summer.
That means that someone who bought a house in Hungary last summer, financing it with a Swiss franc loan, now owes more than twice as many forints as were borrowed, and has a monthly payment that has increased by a similar amount.
