Tuesday's Top 10 with NZ Mint: European debt crisis' 'new and dangerous'; Chinese police gun down Uighur rioters; Fun with Euro bank stress tests; China's bridges to nowhere; Dilbert

Here's my Top 10 links from around the Internet at 2 pm in association with NZ Mint.

I'll pop the extras into the comment stream. See all previous Top 10s here.

I welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

Check out the latest riots in China and its bridges to nowhere.

1. 'New and dangerous phase' - US heavy hitter Larry Summers says via Reuters he reckons the European crisis is entering a dangerous new phase.

Larry wants Europe to do more big bailouts and fast.

This is what the grownups are saying.

Eventually the bailouts and the extending and pretending will have to end.

But when?

That's the problem. Confidence in the ability of the grownups to extend and pretend forever is beginning to wane.

But here's Larry:

The maintenance of systemic confidence is essential in a financial crisis. Teaching investors a lesson is a wish, not a policy. U.S. policymakers were applauded for about 12 hours for their willingness to let Lehman go bankrupt. The adverse consequences of the shattering effect that had on confidence are still being felt now. The European Central Bank (ECB) is right in its concern that punishing creditors for the sake of teaching lessons or building political support is reckless in a system that depends on confidence. Those who let Lehman go believed because time had passed since the Bear Stearns bailout the market had learned lessons and so was prepared. In fact the main lessons learned had to do with how to best find the exits, and so uncontrolled bankruptcies had systemic consequences that far exceeded their expectations.

Second, no country can be expected to generate huge primary surpluses for long periods for the benefit of foreign creditors. Meeting debt burdens at rates currently charged by the official sector for credit – let alone the private sector – would involve burdens on Greece, Ireland and Portugal comparable to the reparations burdens Keynes warned about in The Economic Consequences of the Peace.

European authorities must restate their commitment to solidarity as embodied in a common currency, and the recognition that the failure of any European economy marks the failure of the European economy and is unacceptable. Towards that end they then should make these further commitments.

First, for program countries. Interest rates on official sector debt will be reduced to a European borrowing rate defined as the rate at which common European entities backed with joint and several liability by all the countries of Europe can borrow. A default to the official sector will not be tolerated so there is no reason to charge a risk premium, since charging a risk premium needlessly puts the success of the whole enterprise at risk.

Second, countries whose borrowing rate exceeds some threshold—perhaps 200 basis points over the lowest national borrowing rate in the Euro system–should be exempted from contribution requirements for bailout funds.

2. And here's the critique - Felix Salmon (also at Reuters) then critiques Summers' plan as inadequate.

Somehow, Summers has magically gone from “the debts incurred will in large part never be repaid” to “default to the official sector will not be tolerated so there is no reason to charge a risk premium,” without ever explaining how he got there from here.

It seems, here, that Summers has gone effortlessly from “you can’t just extend and pretend that there won’t be any default to the official sector” to “let’s extend and simply declare that there won’t be any default to the official sector.”

3. Check out this eye-opening view of the global debt situation - Sean Egan, the MD of independent ratings agency Egan Jones, talks on CNBC about how Europe is bankrupt and how America will eventually have to backstop the world's banks.

Egan Jones downgraded its US debt rating to AA+ over the weekend, Bloomberg reports.

“We’ll muddle along, we won’t decrease the debt to GDP,” Egan said today on Bloomberg Television’s “Street Smart” with Carol Massar.

“Then we’ll be faced with the crushing blow of the baby boomers retiring.”

This is fun to watch on CNBC. There's a lot of uncomfortable shifting in seats by the boosters at CNBC.

4. Ratings agencies being deserted - Reuters reports many fund managers are canceling their subscriptions to the major ratings agencies, Standard and Poor's, Moody's and Fitch in the wake of the financial crisis where their easy ratings fooled people into believing in toxic dreck.

Now the big agencies seem to be toughening up...but maybe too late...

Fund firms contacted by Reuters said rating agency research tended to be backward-looking and superficial, and often encouraged the kind of speculation that has recently dragged down Italy, one of the world's largest government bond issuers.

"We have canceled our subscriptions to two of them and they haven't left us alone since. It has been very irritating," the head of sovereign debt investment at one large European bond investor told Reuters on condition of anonymity.

"It would be naive to blame the agencies for everything that went wrong during the financial crisis but anyone who relies on a third party to form their investment opinions is headed for trouble ... clients pay us to make those decisions, it would be completely wrong of us to abdicate that responsibility."

5. The Ten Trillion Dollar milestone - Richard Duncan writes on his blog that central banks have 'printed' US$10 trillion to buy currency reserves, with more than US$8 trillion printed in the last 11 years. HT Jason via email.

China has “printed” the most, the equivalent of $3.2 trillion or nearly a third of the total. That is 50% more than QE 1 and QE 2 combined. Japan ranks second to China, holding 10% of all Foreign Exchange Reserves.

Both China and Japan created money and bought foreign currencies in order to suppress the value of their own currencies and thereby improve the competitiveness of their exporters. That was the primary motivation of all the countries that built up FX Reserves.

Roughly 70% of all Reserves are US dollars. In other words, the equivalent of $7 trillion was created and employed to push up the value of the dollar relative to where it would have been had central banks not intervened. This interference with the free market has come at enormous cost to the United States, which, in large part due to this intervention, has suffered a cumulative trade deficit of $6.9 trillion since 2000, with a corresponding increase in national indebtedness.

Moreover, as central banks acquired the $7 trillion, they pumped it into US dollar-denominated debt such as government bonds, debt issued by Fannie Mae and Freddie Mac, corporate bonds and asset-backed securities. That capital inflow pushed up US asset prices and mollified the American public even as the country’s manufacturing base was being decimated and as most of its manufacturing jobs were being relocated abroad.

6. And another one goes - Welllington tech startup Aptimize, which makes software to optimise website speed, has been sold by its founders to US tech company Riverbed for tens of millions of dollars, Stuff's Tom Pullar Strecker reports.

I worry that continued asset sales will eventually make us poorer. It reflects the poverty of our capital markets and our willingness to spend now rather than save for later.

But others, such as Xero's Rod Drury, are less worried. Rod sees such sales as necessary to build up a pool of capital for something bigger and more locally based.

He cites his example of his selling Aftermail and then using the funds to help build Xero.

I talked with him a few months ago about a similar sale of a Kiwi startup called M-Com.

And here's Part II of the interview where Rod talks about how Xero listed on the NZX and its outlook.

7.China's bridges to nowhere - Those keeping an eye on China will now know the story of how China kept growing through the last three years by substituting for export growth by investing in domestic infrastructure, including roads, bridges, apartments and airports.

Many worry that much of this investment was of such poor quality that will generate bad loans.

Here's Leith van Onselen at Macrobusiness with a collection of articles on this malinvestment, including Wuhan's 140 mile underground railway, the world's longest sea bridge and Guangzhou South's empty railway station.

He quotes from an excellent New York Times article:

In the last few years the cities’ efforts have helped government infrastructure and real estate spending surpass foreign trade as the biggest contributor to China’s economic growth. Subways and skyscrapers, in other words, are replacing exports of furniture and iPhones as the symbols of this nation’s industrial prowess.

But there are growing signs that China’s long-running economic boom could be undermined by these building binges, which are financed through heavy borrowing by local governments and clever accounting that masks the true size of the debt.

The danger, experts say, is that China’s municipal governments could already be sitting on huge mountains of hidden debt — a lurking liability that threatens to stunt the nation’s economic growth for years or even decades to come…

As municipal projects play out across China, the nation’s spending on so-called fixed-asset investment — a crucial measure of building that is heavily weighted toward government and real estate projects — is now equal to nearly 70 percent of the nation’s gross domestic product. It is a ratio that no other large nation has approached in modern times.

Even Japan, at the peak of its building boom in the 1980s, reached only about 35 percent, and the figure has hovered around 20 percent for decades in the U.S…

8. Fun with stress tests - This interactive tool from Reuters' Breakingviews is fun to play with. If you give a few sovereigns a decent size haircut you end up with European banks requiring 250 billion euros in fresh capital...

9. Problems in China - This hasn't gotten a lot of coverage, but should have. Bloomberg reports Chinese police gunned down Uighur rioters in the Xinjiang province yesterday.

China’s official Xinhua News Agency, citing unidentified people at the Ministry of Public Security, said rioters rushed a police station in the city of Hotan at about 12 p.m. yesterday, taking hostages and setting the building on fire. One member of the armed police, a security officer and two hostages were killed, one security officer was severely injured and police “gunned down several rioters,” the news service said.

The Munich-based World Uyghur Congress, citing unidentified people in Xinjiang, said police fired on about 100 ethnic Uighurs protesters in the city’s main bazaar, according to a statement from the affiliated Washington-based Uyghur American Association. The demonstration was against land seizures and disappearances after riots two years ago, the group said.

10. Totally Jon Stewart on the debt ceiling debate.