Tuesday's Top 10 with NZ Mint: Europe's chemotherapy of austerity to cure the heart disease of deleveraging; Spain spreading bund pain; Chinese property market near tipping point; Dilbert

Here's my Top 10 links from around the Internet at 11.30 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.

My must read today is #1. McWilliams describes austerity well for Europe: like putting an anorexic economy on a diet.

1. Prescribing chemotherapy for heart disease - Irish economist David McWilliams has written a withering critique in the FT of Ireland's austerity plans as a way to solve its banking and property meltdowns.

The same critique could be written of any of the fringe European economies trying to cut budget deficits to get out of this mess.

All it is doing is driving their economies deeper into the mire.

Yet that seems the only strategy being pursued at the moment.

I wonder if John Key is watching this.

Here's McWilliams, who has a lovely turn of phrase:

“Don’t piss down my back and tell me it’s raining.” This line from The Outlaw Josey Wales, the classic Clint Eastwood western, is self-explanatory. In contending that the fiscal treaty will solve our dilemma, the European Commission and European Central Bank are pissing down Ireland’s back and telling us it’s raining.

The fiscal treaty will not solve Europe’s crisis. The Spanish and Irish crises stem from too much cross-border private sector borrowing and lending. Ireland’s financial crisis didn’t destroy our nation’s wealth; it just revealed how much wealth had already been destroyed by reckless lending, borrowing and speculation.

Prescribing government deficit reductions to fix these private capital imbalances is like prescribing chemotherapy for heart disease. Today’s large fiscal deficits are a result of, not the cause of, Ireland’s and Spain’s crises. Both countries’ public debt ratios were actually lower than Germany’s in 2008 – but private debts exploded. Since Ireland adopted the euro, its ratio of household debt to income has risen from 93 per cent to 220 per cent.

Such huge consumer debts indicate that without growth, more mortgage defaults beckon. Ireland has too much debt, exacerbated by the ECB’s insistence that our government continue to pay unsecured bondholders of our bust banks. The bond market shut down to Ireland not because we threatened to default but because we threatened not to.

Now Ireland is experiencing an old-fashioned liquidity trap made worse by vicious deleveraging, which is destroying asset prices. Imposing more austerity now will be as useful as putting an anorexic on a diet and expecting her to become voluptuous.

2. Just plain ugly - FTAlphaville points to this chart showing the spread between Spain's 10 year bond yield and the Germany 10 year bund yield over the last five years.

This is a picture of capital flight from Southern Europe to Germany.

3. Feeding the planet - The Economist points to this useful chart supplied by Cargill showing where the surpluses and deficits are in global food production and consumption.

Africa is a real problem still, while Asia is a big importer, which must be good for us.

4. Chinese real estate near tipping point? - Here's FTAlphaville with a roundup of the latest on the world's most important and interesting property market.

The key issues remain high inventory and competition, which could lead to a price war. In our view, the government is unlikely to materially change its stance on curbing speculation in the property sector. This is because there are lingering concerns about inflation and the government’s social housing program has made limited progress in addressing the needs of low-income families.

Property developers in China face tough choices in 2012. Those companies with large maturing debts and refinancing risks on their offshore debt and trust loans are likely to push property sales by cutting prices aggressively or sell assets. As a result, we stand by our base-case forecast calling for average selling prices to drop by about 10% in 2012 due to rising inventory and liquidity pressure.

5. China real estate unravels - Here's Patrick Chovanec from inside China on what's going wrong in the housing market there. It's long and detailed. Well worth a read.

I’m seeing some rather striking patterns in the data that tell us two main things: The market is not poised to recover, but will continue to see greater downward pressure on prices; and Real estate investment is likely to flatten out or start falling, erasing several percentage points of GDP growth.

Developers, burdened by 70% leverage ratios and loans threatening to come due, were rushing to complete whatever projects were already in their pipeline, in order to put those units onto the market and raise cash.  Completions (measured in floor space) were up 39.3% in Q1, compared to last year (residential completions were similarly up 40.0%).  But, of course, those completed units weren’t selling like last year, so unsold inventories expanded. 

At the close of Q1, the total amount of floor space “for sale” was up 35.5%, compared to the same date last year, while the floor space of residential units “for sale” grew 47.4%. (That’s just the floor space that developers admitted was for sale.  There are plenty of tricks they can use to hold units off the market, in order to massage the official data and avoid spooking buyers.  At the end of 2011, total floor space “under construction” was roughly 4.6 times the floor space sold that year.

6.' Spain runs out of money' - Here's Ambrose Evans Pritchard with the argument at The Telegraph.

He says the Germans need to pull finger or get out of the euro.

Bloodcurdling stuff.

El Mundo reports that the country can no longer resist the bond markets as 10-year yields flirt with 6.5pc again, and the spread over Bunds – or `prima de riesgo' — hits a fresh record each day.

Premier Mariano Rajoy and his inner circle have allegedly accepted that Spain will have to call on Europe's EFSF bail-out fund to rescue the banking system, even though this means subjecting his country to foreign suzerainty.

7. And here's the link in BusinessInsider to that now very famous El Mundo report that freaked out Spain's bond markets overnight.

Reports suggest Spain may need an extra €30bn for banks - Spain may need another €30bn to clean up its banking system on top of the €19bn required by Bankia according to El Mundo. The money would be split along the following lines: €10bn for a balance sheet cleanup and €20bn to raise capital levels, citing government sources. The newspaper argues that the €30bn would go mainly to CatalunyaCaixa, Novagalicia and Banco de Valencia.

The newspaper also quoted government sources suggesting that, should the Greece crisis continue and Spanish 10-yr bond spread remain around 500bps, Spain could seek aid from European funds.

8. China's blogging demerits system - Anyone famliar with New Zealand's speeding tickets demerits system will understand the incentives at work in this plan from China to award 'demerit' points for bloggers who use the 'wrong' words on Weibo.

Now there's an idea. Maybe we should do the same thing on Interest.co.nz. Any use of the phrase: 'Ya can't lose with property maaaate...' and you get docked 10 points. Just kidding...

Maybe we could sell points to cancel out the demerits. New business model?

Here's the New York Times:

One of China’s largest hosts of Twitter-like microblogs decreed new punishments on Monday for users who post comments that its editors — and by extension, China’s government censors — deem inappropriate. The service, Sina Weibo, imposed “user contracts” that award each of its 300 million microbloggers a starting score of 80 points.

Points can be deducted for online comments that are judged to be offensive. When a blogger reaches zero, the service stated, a user’s account will be canceled. Users who suffer lesser penalties can restore their 80 points by avoiding violations for two months.

Deductions will cover a wide range of sins, including spreading rumors, calling for protests, promoting cults or superstitions and impugning China’s honor, the service stated. One of China’s largest hosts of Twitter-like microblogs decreed new punishments on Monday for users who post comments that its editors — and by extension, China’s government censors — deem inappropriate.

9. Germany's Mr Sense - Reuters profiles a prominent German economist, Hans Werner Sinn, who has been arguing strongly for Germany to exit the euro. It appears he's getting some traction.

The president of the influential Ifo think tank has been advocating for Greece's exit from the euro zone in newspapers and talk shows for two years, convinced this is the only way for the debt-laden country to avoid economic disaster and for Germany to stop pouring money into a black hole. Policymakers in Berlin do not act on all of his advice. But he has had huge influence on the tone of the euro zone crisis debate in the bloc's biggest member and paymaster.

Sinn, whose name means "sense" in German, believes he has a duty to explain complex realities to voters in layman terms and lay out the best policies from an economic viewpoint, free from ideological bias.

Sinn compares Greece's situation to that of Germany during the Weimar Republic, when it too had to drastically cut wages and prices, fuelling the rise of the Nazis.

"Austerity programs in the euro zone of this order of magnitude are not possible and should not be demanded," he said, noting that youth unemployment was already over 50 percent. "The alternative, however, cannot be to simply fund Greece forever. If you take everything together - the public rescue programs, the haircut on its debt, and Target credit-, the country has so far received 460 billion euros altogether, equaling 116 Marshall Plans," he said.

"And what have you got to show for it? Nothing, just a catastrophe. How much longer must we go on before politicians understand it is a dead end?"

10. Here's Jon Stewart with his latest compilation on alternative energy. Hope he's back soon with some fresh stuff.


We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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QE in that form ie not going to banks, is Public Credit. Reserve Bank committee controls inflation via money supply rather than interest rates. Private banks on 100% reserve lending. Government controls tax and how any additional money is spent but not how much is generated (or withdrawn)

OK so lets play this game.  Let's say "Austerity" (ie. running a long-term affordable debt during recessions) is bad, and we should use "Stimulus" to re-invigorate the market, and magically re-inflate the bouncy castle.  Who's money should be used to do the stimulating, do our kids know that they would have to pay it back instead of us, and what will the future decades look like while the repayment of this stimulus applies a handbrake to the economy?

You don't have to borrow - just tax the rich. They probably caused most of the crisis in the first place.

"...and magically inflate the bouncy castle".
It takes $ 2.50 in NEW debt to "buy" $ 1.00 of economic "growth"
"Who's money should be used to do the stimulating...."
Of course in the end the taxpayers, by government decree, as happens in Europe with the  newly formed ESM = European Stability  Mechanism, whereby countries can be required to deliver the necessary amounts, without questioning or recourse.
Some even claim Goldman Sachs had a hand in this and was instrumental in implementing
From Asian Times
As there is obviously no easy painless solution to the debt problem, it appears there will be in the end Stagflation, Crash and Devaluation of currencies. Or has anybody out there a magic wand? It really will require radical changes, but which government can and is willing to implement them?

$2.50 of debt to buy $1 of growth.  Not so good on margin, but maybe you make it up on volume?

China is due for a property crash and related problems over the next few years, but there has been a structural change in Asia where something like 1 Billion people have gone from subsistance/poverty to middle class consumption and production.  That trend will continue beyond this downturn, and all those people will require food, housing, offices, clothes, cars (!) etc.  The graph in #3 would suggest that a lot of food will be traversing the globe for some time yet.

Wherever you are now, draw a 2 meter circle around you, and count the number of things in that circle that were made in China.  The money will come from everywhere.

My “stuff’ is all with English names nothing from China – Canon , shuttle, philips, brother , panasonic, kaffeetasse.

....... the " stuff " that makes the biggest dent in your wallet ( unless you have a mortgage ) , is probably  electricity & food ...... most of which is " made in NZ " ....

..why are you so serious ?

I'm studiously trying to attach " made in NZ " labels on your electricity , Walter ...... this is not a job for the ......YEEE-OOOOOUCH ...... faint hearted .....

That's a fairly broad definition of "English" ;-)  Most of it sounds Japanese, which is interesting, because I can still remember when Made in Japan meant "cheap imitation".  The short period of Chinese history where they were not a major powerhouse of design and manufacture is almost over.

That trend will continue beyond this downturn, and all those people will require food, housing, offices, clothes, cars (!) etc.
Before that structural change (and the numbers I recall are that it is 500 million and not 1 billion) 'all those people' simply didn't require food to survive?
Other data of course suggests that 'all those people' were already adequately fed before your structural change.

Got sent this the other day, a very recent BBC doco (pre French Presidential elections) on the Euro & how/why the monetary union came about. An interesting watch, although the presenter can wear thin at times.

Can youse lot keep a secret ? ..... there's not many people know this , but based upon the law of averages , one in every 8 companies that list on the ASX will eventually become a 100 bagger , or more !
.... that is , at some time in their lifecycle , 12 % of all companies will take your $ 10 thousand , and convert it into a cool $ million ......
Just remember to be careful in your picks , don't be hastie , OK .

Hey Gumster how'd you like Steve Keen's idea to make shares "jubilee shares"?
Any given share can only be traded 7 times, and upon the 7th trade it starts counting down a 50 year lifespan.....    all this with the goal of discouraging people who buy and sell shares without adding anything to the economy. Great idea eh Gummy? 

Bernard's already got me on my super-duper-especially-ever-so-serious last warning , so I'll respectfully decline to comment any further on that prize nincompoop Steve Keen ......
........ " nincompoop's " alright , Bernie ?

because he says that the secondary markey in shares is "a whole gambling system based on the greater fool."
are you gonna bite gummy?

.... truth be told , ever since Keen took his walk up Mt Kosciousko ...... his credibilty took a plunge off the cliff .... only a nincompoop would predict the housing market to " crash " , simply because it's above the long term trendlines ....
Now , back to pin-pointing that 1 in 8 stock which is gonna go 100 fold upskie ... " the stockmarket is the greatest game on earth ! "

GBH: As a "grand-master" in pin-pointing mode can you give us your guide to the issue of Fonterra shares (dry-shares, wet-shares, voting-shares, non-voting-shares)  and the question is:-
Would you be a buyer?

Fonterrible ! ........... aha ha ha de haaaaaaaaaaa ...... ooooh , you've got a wicked sense of humour iconoclast ............ haaaaaaa , good one !

I thought you and Christov's angel would be a good litmus test.
The resident dairy people here can rest easy that the guys in the top-paddock are not going to make a killing.

Nincompoop is fine Gummy.
Avoid the insults with 'F' in them ... ;)

The share jubilee must be one of the stoopidest ideas I've heard in a long time!!!

#1 "Yet that seems the only strategy being pursued at the moment."
The problems aren't economic per se, they are political. Economics isn't a distinct discipline, its a subset of politics and like politics mostly determined by human psychology. It used to be correctly called political economy before it was given a bullshit veneer of a legitimate science with a few graphs, bits of algebra and the premise of the rational man, equilibrium etc.
There are a number of alternatives for countries like Ireland that don't involve bailing out private banks/corporations. Its just that they are not palatable to the financial elite of the world and thus the politicians they control by fair means or foul. The financial press are mostly there to assist in this by playing up the armegeddon scenario to scare everyone into submission and convince the public that the banks as they stand are essential to human existence. They're not. The press also act as gatekeepers to "frame" the debate and dissemination of ideas and to supress by omission those ideas and concepts that are unacceptable. Works the same way in economics as it does in foreign policy/defence. Scare the public with a bogeyman.
Blogs like this one are different but still don't have the reach or legitimacy in the public mind of say the Herald or TV1. In all countries mainstream media is very much a protector of the status quo. As this form of propaganda control weakens "democratic" governments everywhere will be faced with imposing more overt and sinister forms of supressing rogue thought to maintain this status quo. Then begins the descent into facism or popular revolution depending on how many people decide to acquiesce or resist.

FYI Roche has stopped supplying pharmaceuticals to 12 Spanish hospitals because of unpaid bills.
The effects of the debt crisis are about to become very real for some doctors and patients in Valencia, Andalusia, Castilla-La Mancha and Castilla y Leon after Roche AG said a dozen hospitals in Spain won’t receive drug deliveries unless they pay for those they have already used, El Pais reported. Some hospitals have allowed drug bills to go unpaid for more than two years, and Roche warned last September that time would soon be up – it’s owed more than 6 billion euros, according to the newspaper.
The Spanish hospitals join 23 others in Portugal that are in the same situation, after they failed to pay the drugmaker for almost three years. In Greece, Roche has implemented a payment-on-delivery system to keep hospitals supplied.

Well there is your aging baby boomer problem about to be solved :-P

How on earth does a law firm build up US$500 million of debt? Greed seems the answer.
Dewey and Lebouf has just filed for Chapter 11 bankruptcy protection.
The firm was eventually undone by a combination of the economic downturn, excessive compensation and governance problems, according to former partners and others in the industry. In particular, Dewey's management promised millions in packages to about 100 partners, according to the court filing, leaving it strapped for cash when revenues fell during the recession.

Lawyers out of work, can I be permitted to cry?
Sore-Loser that is hilarious.

The Bank of England is now planning for a Eurozone breakup, The Telegraph reports.

The Bank of England is poised to cut interest rates or launch another round of quantitative easing if the euro collapses, it has emerged.

Matt Nippert from Fairfax reports: Bankruptcy is likely for one-time Auckland property king Don Ha, says a liquidators' report.

And here's a survivor's guide to the end of the euro from Peter Boone and Simon Johnson
In every economic crisis there comes a moment of clarity.  In Europe soon, millions of people will wake up to realize that the euro-as-we-know-it is gone.  Economic chaos awaits them.
To understand why, first strip away your illusions.  Europe’s crisis to date is a series of supposedly “decisive” turning points that each turned out to be just another step down a steep hill.  Greece’s upcoming election on June 17 is another such moment.  While the so-called “pro-bailout” forces may prevail in terms of parliamentary seats, some form of new currency will soon flood the streets of Athens.  It is already nearly impossible to save Greek membership in the euro area: depositors flee banks, taxpayers delay tax payments, and companies postpone paying their suppliers – either because they can’t pay or because they expect soon to be able to pay in cheap drachma.

And here's Tyler Cowen about Spain's future:
Spain is in a self-cannibalizing downward spiral, as Greece was and is.  It will not end until there is, at the bottom, an absolute and total crash.

And Bloomberg:

Spain Delays and Prays That Zombies Repay Debt
Spanish banks are masking their full exposure to soured property loans while they continue to prop up insolvent “zombie” developers, leading to credit-rating downgrades and plummeting share prices.
“Spain has engaged in a policy of delay and pray,” Echavarren said in an interview. “The problem hasn’t been quantified by anyone because there is huge pressure not to tell the truth.”
The Economy Ministry says that Spanish banks have 184 billion euros of developers' loans and assets that are “problematic,” while the remaining 123 billion euros are performing. The need for more reserves to cover losses on the loans can’t be ruled out, Nomura International analysts Daragh Quinn and Duncan Farr said in a May 14 report. If Spain took losses on developer loans like Ireland did, Spanish banks would need 8.9 billion euros under the best case to 76.5 billion euros of additional provisions in the worst scenario, Nomura estimates.

And here's the Telegraph on a US$46 trillion debt problem...
Just as you thought things couldn't get any worse, credit markets are about to be hit by a veritable tsunami of maturing corporate debt. Standard & Poor's estimates that companies in Europe, the US and the major Asian economies require a combination of refinancing and new money to fund growth over the next four years of between $43 trillion and $46 trillion. The wall of maturing debt is unprecedented, raising the prospect of further, extreme difficulties in credit markets.

The problem with that statement is the maturities schedule could be

  • 1 June 2013 $1 Trillion
  • 1 June 2014 $1 Trillion
  • 1 June 2015 $1 Trillion
  • 1 June 2016 $40 Trillion

or it could be

  • 1 June 2013 $40 Trillion
  • 1 June 2014 $1 Trillion
  • 1 June 2015 $1 Trillion
  • 1 June 2016 $1 Trillion


And here's Alistair Helm at Realestate.co.nz saying that anyone who bought property in NZ from September 2005 may not have made any real money...
So if you bought in January 2003 removing the impact of inflation the average NZ property will have appreciated in value by 45%, whereas sadly of you purchased a property in January 2008 the average NZ property will have depreciated by 7%.
What this also means as illustrated on the chart by the dotted vertical line, is that property purchased nearly 7 years ago in September 2005, when adjusted for inflation over the period has not really appreciated at all.

And British companies are preparing for a Euro collapse
British electrical retailer Dixons has spent the last few weeks stockpiling security shutters to protect its nearly 100 stores across Greece in case of riot.
The planning, says Dixons chief Sebastian James, may look alarmist but it's good to be prepared.
Company bosses around Europe agree. As the financial crisis in Greece worsens, companies are getting ready for everything from social unrest to a complete meltdown of the financial system.

Good links BH - but nothing surprising.

This is fun. Japanese Doomsday merchants pulling their money out to buy second homes in... wait for it... New Zealand...we're saved...
Hiroshi Kosaka has an unorthodox pitch for his realty business: instead of pictures of swanky condominiums his website features Japanese debt statistics and budget meltdown scenarios usually left to credit rating agencies.
His firm is part of a cottage industry that has sprung up to help worry-prone Japanese savers get out of the yen and find property overseas that could serve as a safe haven in a financial disaster. The trend comes against the backdrop of a deepening pessimism about Japan's economic future that has made "Escape from Japan" a hot-selling business book and helped drive sales of second homes from New Zealand to Malaysia.
The Japanese have been buying real estate overseas in the past, but what has changed since last year's earthquake and the Fukushima nuclear crisis is that it is no longer the province of the rich and the retired.
Increasingly, the middle class and younger people are opening bank accounts in Malaysia, New Zealand and Singapore to buy condominiums and homes that they plan to rent out for a few years before they eventually move in themselves.

"the middle class and younger people are opening bank accounts in Malaysia, New Zealand and Singapore to buy condominiums and homes that they plan to rent out for a few years before they eventually move in themselves."
And what makes these Japanese think they will get permanent residency in order to live in these homes in foreign countries?  Also all the home buyers who live in these other countries are now having to compete against these Japanese (and Chinese buyers).  Think this will work out well?  I'm sure our PM does!

Luvverly wee comment over at ZH from David Stockman:  investing is easy as ABCD
Thought yer'd like that, GummyB, being as how yer prolly knee-deep in Hard Assets.