Tuesday's Top 10 with NZ Mint: Hard landing brewing in China; Silent European bank run under way; Euro a 'weapon of monetary mass destruction'; Niall Ferguson's future history lession; Dilberts

Here's my Top 10 links from around the Internet at 8 am in association with NZ Mint.

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

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

Niall Ferguson at #7 is good fun. And Jon Stewart on the Super Committee failure is hilarious.

1. Hard landing possible - Forbes reports China may be facing a hard landing as Europe and America face recessions at the same time that China's housing bubble begins to deflate, or worse.

This is the key inflexion point for New Zealand to watch.

China was able to turn on a dime in late 2008 when global trade slumped 30% after the Lehman Crisis.

It printed more than US$1 trillion and invested it in domestic infrastructure to keep millions employed as exporting factories on the coast shut down.

But this created inflation.

So the Chinese authorities have been trying to slow down the Chinese economy over the last year.

Now it's working, but maybe too well. If it slows to 7-8% then New Zealand will be ok, or so the theory goes.

If it has a hard landing and slows to 4-5% then New Zealand will not be ok, or so the theory goes.

Barclays suggests a hard landing is in the offing:

Most, if not all, of China’s slowdown was government engineered, Barclays suggests, but policymakers are beginning to reverse the cycle.  The global economic slowdown will impact China’s exports, which make up a big part of GDP. 

According to Barclays, a recession in the U.S. where output falls by 1% and in the Eurozone where GDP contracts by 3.5% would shave off 4 percentage points from Chinese GDP growth.

Even more worrying for the People’s Bank, a 10% to 30% fall in real estate prices would subtract 0.5% to 1.5% from GDP growth.

2. Bank rating downgrades loom - Reuters reports Standard and Poor's is getting ready to cut the credit ratings for the world's 30 biggest banks, which could again add pressure to global stock and bond markets.

"One reason there could be surprises is that the new ratings method is very complex and it has been very difficult to simulate results," said Beate Muenstermann, a London-based research analyst for the money management arm of JPMorgan Chase & Co.

One area for potential surprise lies in differences between actions the agency may take on bank holding companies compared with grades for their operating units. Another is variations between long-term and short-term ratings.

3. Sign 'o the times - The New York Times reports on the online outrage that ensued when a truck in China slammed into a school bus, killing 21 children and 2 adults.

Maybe there is a lot of stuff beginning to bubble up from the depths in China...

Days after a nine-seat van crammed with 62 kindergartners slammed into a coal truck in northwest China this week, killing 21 children and two adults, the 21st Century Business Herald - a state-run, reliably nationalistic newspaper - did something extraordinary.It published a chart.In one column, the paper recounted recent school-bus accidents in which about 60 children had died.

In an adjacent column, it listed the sums that selected Chinese government departments had lavished on new cars in 2010.No Chinese citizen needed a pencil to connect the dots.Since the accident on Wednesday in Gansu Province, China's Twitter-like microblogs and other social media sites have been alight with heartbreak and outrage over the tragedy - and they have been subsequently red-carded by government censors for unpatriotic emotion.

"Most Chinese aren't angry about rising inequality," said Martin K. Whyte, a Harvard sociologist who specializes in research on Chinese social trends. "It's not rich versus poor. It's the system of power and procedural injustices that they're upset about."

4. The silent European bank run is on - The New York Times reports US money market and funds and banks are quietly pulling out of Eurozone bonds and banks.

The European bond sell-off has been similarly sharp, accelerating in the third quarter, according to a research report by Goldman Sachs. European banks trimmed their exposure to Italy by more than 26 billion euros in the third quarter, for example. French banks like BNP Paribas and Société Générale, whose shares have been pounded lately because of their sovereign debt holdings, were among the biggest sellers.

Meanwhile, American banks have become skittish about lending to European institutions over similar concerns. Of the biggest banks that lend to Europe, about two-thirds have pulled back on lending to their European counterparts, according to the most recent survey of loan officers by the Federal Reserve.

American money market funds, long a key supplier of dollars to European banks through short-term loans, have also become nervous. Fund managers have cut their holdings of notes issued by euro zone banks by $261 billion from around its peak in May, a 54 percent drop, according to JPMorgan Chase research.

5. Europe's moral hazard dilemma - Liam Halligan writes well at The Telegraph about the enormous question for Germany and Europe: should they force the European Central Bank to bail out Southern Europe?

Because once they've done it, everyone will expect it again and again and again...

Should Germany sanction the European Central Bank to guarantee the sovereign debts of all and sundry, with “printed money”?

 

Global equity markets would certainly rally if so, at least for a while. And eurozone bond yields would fall.

Taking this route would contravene European Union treaties, as Merkel well knows.

Far more importantly, once the ECB has bailed-out profligate governments once, the same countries will over-borrow all over again a few years down the line. The markets will eagerly lend to them too, such loans combining a lucrative yield with a de facto ECB guarantee.

The job of any central bank, the ECB included, is to act as “lender of the last resort” to commercial banks in its jurisdiction that are solvent, but in need of temporary liquidity.

Central banks aren’t meant to dish-out free money to governments that have spent themselves into insolvency.

“Moral hazard” isn’t some kind of intellectual indulgence. It’s a stark fact of life, a reminder that actions have consequences and those consequences can’t be ignored. M

aybe Merkel will attempt to “muddle-through” - printing a bit here, a bit there, trying to keep it all under wraps. If so, she will learn that the status quo really isn’t an option. The euro in its current form is incendiary and explosive, a macro-economic weapon of mass destruction. It simply must be defused.

6. Spanish youth unemployment rate is 46% - Yet the Spanish just voted for more austerity. Ambrose Evans Pritchard writes at the Telegraph about the Spanish election landslide in favour of the austere centre-right overnight.

Ambrose blames the Germans. There's plenty to be shared around.  

Spain is a disquieting story for northern neo-Calvinists, still clinging their morality tale of what went wrong with monetary union, a belief that feckless Greco-Latins borrowed their way to disaster, and that Teutonic virtue for all is the path to redemption.

More than any other country, Spain exposes the lie behind this German narrative. It did not cheat, like Greece. It did not breach the Maastricht Treaty’s 60pc debt ceiling like Italy (or Germany itself). Its public debt was 36pc of GDP before the Great Recession. It ran a budget surplus of almost 2pc of GDP in 2007 and 2008.

We can all agree that Spain has been far too slow to dismantle its Franco-era apparatus of labour privileges, or to end the inflation-linked wage rises eating away at intra-EMU competitiveness. But that is just one aspect of the story.

“The eurozone crisis is as much a tale of excess bank leverage and poor risk management in the core as of excess consumption and wasteful investment in the periphery,” said the CER paper.

Indeed, Spain has been the biggest victim of cheap capital from German, Dutch, and French banks. It was further destabilized by the loose policies of the European Central Bank.  

7. Just imagine... - Niall Ferguson wonders in the WSJ what life would be like in Europe in 2021.

Life is still far from easy in the peripheral states of the United States of Europe (as the euro zone is now known). Unemployment in Greece, Italy, Portugal and Spain has soared to 20%. But the creation of a new system of fiscal federalism in 2012 has ensured a steady stream of funds from the north European core.

Like East Germans before them, South Europeans have grown accustomed to this trade-off. With a fifth of their region's population over 65 and a fifth unemployed, people have time to enjoy the good things in life. And there are plenty of euros to be made in this gray economy, working as maids or gardeners for the Germans, all of whom now have their second homes in the sunny south.

8. What the US money market funds - Reuters reports they are worried about Europe and thinking again about that horrible moment after Lehman when one or two 'broke the buck'.

When Lehman Brothers collapsed in 2008 and shattered the belief that U.S. money market funds would never "break the buck," Washington rushed to limit the damage.

But as Europe's debt crisis threatens to put the U.S. financial system under strain again, U.S. policymakers are worried they cannot turn to those same, impromptu tools to shore up the $2.6 trillion money markets industry.

"We've done a lot to prepare the banking sector," Jeffrey Lacker, president of the Richmond Federal Reserve Bank, said on Wednesday. "I'm less confident about the money market funds and their ability to weather major problems at European institutions."

9. Not so much daily bread - Paddy Manning reports at SMH.com that Goodman Fielder is considering stopping making daily deliveries of break to supermarkets because of intense discounting in Australia.

Yum.

The company's new chief executive, Chris Delaney, said it urgently had to develop "a new business model for baking", which had suffered a dramatic earnings drop, partly due to intense discounting by supermarkets selling their own brands.

Mr Delaney said the company would review its product range and attempt to extend shelf life of bread.

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Asked by one analyst if Goodman Fielder planned to deliver bread every second or third day, he said the company was looking at various options and plans would evolve over the next few years.

"We believe, based on where the industry is outside of Australia and New Zealand, there may be an opportunity to extend shelf life without compromising quality to the consumer,'' he said.