Wages and buying power:gap between Austria and Slovakia/Czech/Poland shrinking

Until recently, Austria's neighbours in Central Europe were ahead by a nose with investors, especially because of the cheap wages paid in the East. However, that situation is changing rapidly. The wage and buying power gap between Eastern and Western Europe is getting smaller. This will have an effect on the competition for locations in Europe in the future.
This is the conclusion reached by a new study conducted by the Vienna Institute for International Economic Studies on behalf of the consulting company TPA Horwath. The study looked primarily at unit labour costs and buying power in ten countries in Central and Eastern Europe: in other words, what the state collects in each case, take-home pay for individual workers, and what you can actually buy for that amount in various neighbouring countries.

In the case of unit labour costs, the differences are still huge. Unit labour costs in Eastern Europe are below those in Austria. People also earn significantly less, although their wages are increasing, and the amount they have left over varies.

Well paid jobs at banks and insurance companies

In Austria, in 2010 average labour costs were EUR 3,966 a month. This put Austria streets ahead of Central and Eastern European countries included in the analysis. Slovenia, a model country in economic terms, has on average 44 per cent of Austrian labour costs. The earnings level in Austria here is 54 per cent higher than for the economy as a whole. Similar industry-specific differences can also be seen in Slovenia and Croatia. The earnings gap is considerably larger in all the other Eastern European countries studied: as much as 80 per cent in Poland and 143 per cent in Romania.

Net earnings: much smaller gap

However, a very different picture emerges in a comparison of average net earnings (gross wages after deduction of taxes and social security contributions) and real buying power – in other words, what people can buy with their incomes. Here it becomes apparent that the gap between Austria and the Eastern European countries is much smaller. For example, in 2010 the ratio of net earnings to so-called purchasing power parity in Slovenia was 63 per cent of the Austrian level (of EUR 1,800), followed by Croatia (59%) and the Czech Republic (58%). The level of net earnings was somewhat lower in Poland (53%), Slovakia (49%) and Hungary (42%).

Where do employees have more take-home pay

Convergence of wages

The analysts extrapolated current trends from these varying costs and deductions: unit labour costs are rising steadily in Eastern Europe. In fact, despite everything, in almost all the countries studied this is happening at a faster rate than in Austria. As a result, wages are slowly converging on those in Austria. At present, average labour costs are 44 per cent of the Austrian level. Growing competitiveness is driving this primarily because Central European countries are increasingly using modern “western” technologies. Furthermore, Central European countries are gradually developing a strong industry that is far more productive than small businesses.

Receptive to investors

Finally, despite relatively high tax and contribution ratios, the institute’s experts found a striking receptiveness to investors in Central and Eastern European countries. For example, at the height of the prolonged global economic crisis, taxation policy raised value added tax rates rather than taxes on work.

The work cost factor is decisive for the choice of location

There are still very significant differences in the case of direct taxes (such as income and corporation tax), the experts at TPA Horwath in Vienna concluded. In Austria, in 2009 direct taxes accounted for around 30 per cent of total taxes, which was however still below the average for the EU 27. Hungary was next, fairly well below Austria with a rate of 25 per cent of direct taxes in total earnings, then Romania, Poland and the Czech Republic between 24 and 21 per cent. Direct taxes played the smallest role in Slovakia (around 19 per cent). Trend: during the crisis, Eastern European countries tended to increase value added tax, while lowering income and corporate tax. This was a definite advantage for investors.

Who is doing well in the Eurozone and who is stagnating

Growth and debt, check out the performance of Slovakia particularly GDP for 2011

On infectious greed as a development model...

One of the leading lights in the current government of Slovakia opined that Slovakia should attempt to become more like singapore or hong kong, a small extremely liberal enclave in the wider market of the EU and eurozone.

The allure of places like this should be tempered by the following facts.

1. they are usually accidents of history and are usually not countries proper (this is true of both Hong Kong and Singapore)
2. They have massive economies right next to themselves, and the rich of these countries usually uses these territories as a place to hide their money from taxes.
3.   ermm.. this... http://video.ft.com/v/621971804001/Hong-Kong-s-property-extremes-cage-the-poor

The PIIGS will not sink the euro - Economist Intelligence unit & BBC link to Joe Stiglitz discussing

http://www.bbc.co.uk/blogs/thereporters/gavinhewitt/2010/02/s_6.html

greek sovereign trials and tribulations and their impact

Although we do not believe in a further deterioration of the situation in Greece in the long term because the political climate in the country has changed in a way that has not been seen in 30 years. The important news is that reckless finances will become a thing of the past.

Just to clarify we do think that some of the hystrionic press about Greece defaulting was an attempt by traders to cause a self-fufilling crisis based on rumours so they can profit from their short positions.

The graph here shows just how bad the situation is compared to other european countries. This graph captures by how much greek politicians have led the country down a blind alley and how irresponsible the last 30 years have been.

Nevertheless it is clear now that there is a defacto economic government imposed on the club-med members of the EU. It also means that the norms of german financial conservativism will become best practice and in the long term that bodes well for Greece and the rest.

Central Europe vs. Balkans

But what about eastern europe and central europe? (for those that think they know the difference between central vs. eastern europe look at the map for your education...)

For one thing the crisis showed that countries with bad fiscal management suffer whether they are in the eurozone or not. Slovakia, Czech republic and Poland come out of all of this with more credibility as financial actors.

The countries with bad management of their finances and high corruption Greece, Romania, Bulgaria, and the rest of the balkans now seem to be a category of their own. We need a new name for it, but i think for now the Balkans+Romania will do just fine

Legendary commentator and economics professor Nouriel Roubini and his team share their views on the prospects for this region. Our conclusion from this is that given that we see the EURO as safe despite the greek melodrama, for central europe the likely outcome is that Slovakia will carry on being the only euro member in the region, and is likely -after a short pause- sweep all the FOREIGN DIRECT INVESTMENT for itself. This is the way we interpret the last comment on this piece.

What Greece’s Fiscal Crisis Could Mean for Eastern Europe

Mary Stokes and Jelena Vukotic

Feb 22, 2010 11:42AM

Eastern Europe & Southeastern EU will likely feel reverberations from Greece’s fiscal woes. While the possibility of contagion via trade and FDI channels is limited, transmission via the financial channel is a real risk in Bulgaria, Romania and Serbia, given the strong presence of Greek banks in these markets. Any direct spillover effects will likely be limited to these South East European economies, but the potential for indirect effects must also be taken into account.

On the positive side, Greece’s fiscal crisis highlights the comparatively better fiscal positions of EU newcomers in Central Europe. Nevertheless, troubles in the eurozone periphery could further delay euro adoption, which could weigh on emerging European assets going forward.

Grεεk dεbt disastεr

Posted by Tracy Alloway on Jan 18 10:40.

Here’s a singularly-arresting chart from Deutsche Bank’s excellent fixed income team:

That is foreign banks’ holdings of European government debt, and there is an unexpected standout: Greece.
The chart highlights two concerns; firstly, the potential for banks to be burned by the situation in the Hellenic Republic, and secondly, the extent to which the country has relied on outsiders to finance its deficit in recent years.
Here are the DB analysts, headed by Gilles Moec, with a bit more detail:

Such inflows leave an economy vulnerable to a sharp withdrawal of funds at some point in the future should foreigners lose confidence or face liquidity constraints that prevent them from maintaining this exposure. A breakdown of net international investment positions for some of the more vulnerable EMU economies highlights this predicament.
Financing of C/A deficits generally takes two forms – debt creating and non-debt creating inflows. Non-debt related inflows refer to FDI and equity, debt-related inflows can be in the form of either portfolio flows into domestic public or private fixed income markets or loans (e.g. trade credit, syndicated loans). In Greece’s case the majority of its negative net international investment position relates to portfolio flows into the public sector which foreigners can choose to sell whenever they wish. At end-Q3 foreigners held EUR216bn of Greek government debt (72.3% of the total market, 90.2% of GDP), having doubled their position since end-04. Given recent downgrades and another round of revisions to budget data from previous years, a sharp slowdown or even reversal of inflows from foreigners into the local debt market has become an increasing risk.

Matters are made worse by the fact that the ECB has taken a hardline stance on the collateral criteria for its liquidity ops. That means if Greece is downgraded by Moody’s (the only agency still rating it at the A-level) its debt will no longer be eligible for the ECB facilities once the central bank raises its collateral-threshold back to its original level of A-.

Greece is probably hoping that foreigners will continue to finance the government for the rest of 2010, some investors have been piling in to Greek bonds in anticipation of a bailout, but there are signs that may get more difficult.

The country’s Public Debt Management Agency has already said it will not sell any bonds to the market this month, instead opting to focus on T-bills. Bid-to-cover ratios for last week’s auction of 52-week bills was fine at 3.05, but yields rose 119bps to 2.2 per cent. Which means, in short, that investors are demanding more and more of a premium for holding Greek debt.
If foreigners do retreat from Greek debt, the government will no doubt be hoping that its domestic banks could step in to replace them. That however, may also prove problematic, according to DB:

Full financing from the domestic banking sector is probably also not viable. December saw the government sell EUR2bn in bonds in the form of a private placement to 5 banks, 4 of which were Greek. Should the government rely entirely on its domestic banking sector for financing this year, it would result in a 163% increase in their holdings of Greek government debt relative to end- October (EUR32.5bn)1. In the absence of an increase in banking sector liabilities, Greek banks would move from holding 8% of their assets in Greek government debt at end October to 20.2% of their total assets by end-2010. This would only materialise if Greek government debt could not be posted at the ECB as collateral but would undoubtedly translate into a sharp fall in the stock of private sector credit and a more negative growth outcome than is projected by the government, endangering the government’s fiscal targets.

fraudsters in the eurozone = Greece | Απατεώνες στη ζώνη του ευρώ

 The german focus magazine is right to convey the outrage at the incredibly unprofessional manner greek finances have been managed for 30-40 years

It is time to have a complete policy overhaul in Greece and copy Scandinavian countries in their organisation and fairness.

In a way it is fair, because now countries like greece will not enjoy the fruits of the labour of responsibly managed economies like Germany (GDP debt ratio 67%) or Slovakia (GDP debt ratio 38% yes really!)


A good and hopeful article that caught my eye.

Narcissism and synomosiologia
By Alexis Papahelas
We are at a breaking point in our history. Our nature can lead us to two very different paths, a difficult but creative one, or another one that seems easy and is a long suicidal path to destruction.
It is obviously easier to amoliseis a narcissistic nationalist crown and appealing to the Greek conspiracy theories than to see in the problem and enforce tough solutions. It is certainly very reasonable and fair to the morally bankrupt political establishment to resort to such solutions.
 
We can't scare the Germans especially when they are the main likely saviour. We have already suffered enormous damage to our image internationally. Finally, no one now feels that greece is owed anything. We redeemed our brownie points for Pericles and the spread of democracy, the fight against nazism of 1940. We played all our cards. 

So there is the path that leads to introspection and an imaginary war with dark forces that envy and hunt us. The other way is to anger with what we hear and read about our country and ourselves to say 'Well, no man, we do not deserve this. We did muck it all up but we are a strong country with many advantages and a people that knows how to put things right in the end." That anger may transform into hard work and a new vision. It requires, however, a look in the mirror and an admission of our mistakes. 




We have touched rock-bottom. The choice is ours now, whether we resort to third-world thinking in the role of the victim or whether we seize our destiny in our hands to stop being the laughingstock internationally.

Swedish Ambassador on Slovakia

"The rapid transformation of Slovakia to a modern European society, within a remarkably short time, still makes a strong impression on me. The generally supported commitment to fundamental changes and the resilience of the Slovak people facilitated this challenging turnaround. Thrown into the mechanisms of fierce world market competition, at the same time accommodating a complete make-over of the society, Slovakia stood the test. Its full integration into EU structures, including last year’s adoption of the euro, displays that success.

On a somewhat lighter note, I think that features shared by countless Swedes and Slovaks, like the passion for outdoor life and ice hockey, tourism and popular music, will remain the most valuable inspiration for our continuous people-to-people contacts, arousing mutual curiosity and interest also in a broader sense."

Mikael Westerlind - Swedish Ambassador to Slovakia

Greece in crisis - why is greece suffering and why it is frowned upon by other eurozone members

If one listens to greek media reporting on the crisis there is this constant wounded pride and sulking in the reporting, and a certain disbelief that things are so bad. There is also a certain victim mentality.

In the beginning of this crisis many countries violated the rules of the Euro by a bit.. It was a reflection of the huge sudden crisis, and the European Central Bank reasonably made some allowances if the violation of the rules on deficits a eurozone government committed was

1. relatively small and
2. temporary
3. measures were taken to put it right as it happened by the government concerned without the prodding of the ECB.

4. The markets regarded these measures as credible.

Basically France through it long standing behaviour for hundreds of years has earned a reputation for competence.

In greece the situation was and is different. This is why the ECB is more strict with greece as it should be.

Greece on the other hand stands accused of the following triggering the lack of willing investors buying greek bonds with confidence.

1. The greek statistical service was lying to the EU about the deficit, as it was lying to join the Euro in 2001. That is unfair for a country like Latvia for example which missed becoming a eurozone member by a few tenths of a percentage. But they didn't lie about it. This childish behaviour is embarrassing and barbaric and shameful! The Greek statistical service is led by the usual party lackeys and had no people with dignity that would stand up to the government when it forced them to lie about the Greek deficit. The fact that there are no whistleblowers in the greek civil service is even more troubling.

2. Greece had a massive deficit that it was lying about even before the crisis. The liberalisation of banking was making the private sector of greece indebted just as much as the public sector has traditionally been. This was making greece steadily even more of a basketcase than it already was. Greeks are now astonished that counterparties dont want to lend more money.

3. Greece has had a tradition of using devaluations of its currency to adjust to the real world which was totally different to the economic management of the eurozone. When we joined the euro however we got up to our old tricks and there was no reform. However the easy option of devaluation does not exist anymore.

4. The olympics were an orgy of public spending with plenty of white elephants. It was economically slightly negative or at best neutral. That is constantly touted as a great achievement which mystifies me.

5. Every single government that gets in in the last 30 years promises to fix the economyand the public debt. Every single one has not delivered. Why should the europeans think this will change now? When there is the slightest bit of difficulty Greeks fiddled the figures. Greeks cannot continue to piss on everyone else in the eurozone.

6. The measures the governement of Pasok has taken to fix the deficits are small, have been tried before with little success, don't show a change of policy when it comes to hard numbers.

7. The Pasok government got elected promising that it will spend even more money that it doesn't have which is basically lying again, now we want to regain credibility? Its not a very good way to start a government that wants to be believed. The finances were terrible even before the election and Papandreou knew how bad things were but he lied to get elected..

8. There is another dimension of an inter-generational robbery. In short one generation has leveraged the country's balance sheet as if it was fighting a war or worse. The money has ended up mostly as consumer spending by well-connected individuals. The end result is a huge bill that now creditors do not believe is serviceable anymore. Basically the country's shrinking young generations are called to: 1. have children and finance their education, 2. buy a place to live, 3. Pay all the taxes to pay back all the debt and interest that has been accumulated. No wonder lenders don't want to lend any more money, they feel that they will lose the sums they have lent already.. 

Given these points Greeks need to become more financially educated and involved in the decisions being taken in their name. The state finances are their problem.

Other eurozone countries have learnt to live within their means, not least Slovakia. Greece needs to let the talented professionals it does have, and that are qualified to design its economic policy going forwards.

Slovakia vs. Czech republic - Economic development

Basically Slovakia had an abrupt crisis with a sharp contraction but also an equally large improvement.

Zdenek Tuma, the governor of the Czech National Bank, said being in the euro had helped spare Slovakia the worst of the economic disruption that affected the rest of the region including his country.

For example Slovakia’s cost of borrowing on international markets was cheaper than for the Czech Republic.

Slovakia’s economy is forecast to grow 3.1 per cent in 2010, far greater than the 0.3 per cent forecast by the Czech finance ministry.

As growth returns, investors are trickling back, with some saying they are tempted by the prospect of avoiding currency risk. “The euro allows us to make long-term plans and it eliminates exchange rate risks caused by the volatility of the Slovak crown,” says Vladimir Machalik, a spokesman for Volkswagen Slovakia, which is starting production of a new small car in its factory outside Bratislava.

In a further sign of confidence Taiwan’s AU Optronics signed a €191m agreement last month to open an LCD television component factory in Slovakia.

Although Slovak workers have become slightly more expensive than those of Poland and Hungary, they are still much cheaper than their rivals in western Europe, and investors already in the country are unlikely to make decisions to relocate based on possibly temporary changes in exchange rates.

Politically, joining the euro has proved to be a coup for Robert Fico, the prime minister. A survey shows that almost 80 per cent of Slovaks approve of their new currency, which Mr Fico has called Slovakia's “shield”.

It also proves that despite his faults Robert Fico is a commited left of centre politician that agrees with the overall development strategy of Slovakia, but wanted to make sure that where there are market failures or lack of competition this is rectified and that there are real rules in the game.

However, Czechs have maintained their reservation about rushing towards the common currency. Mirek Topolanek, former prime minister and leader of the centre right Civic Democratic party, says the Czech Republic may be ready in 2015 to begin discussing joining the exchange rate mechanism, a precursor to joining the euro.

But Czech businesses do not seem to share this assessment. “We (Czech republic) need the euro as soon as possible in order to be able to address the current problems caused by the world financial crisis,” says Jaroslav Cerny, spokesman for Skoda Auto, a Volkswagen subsidiary.

“A failure to introduce the euro may drive not only our current suppliers, but also all potential investors, out of the Czech Republic.”

Eurozone and Slovakia look set to grow faster

VIENNA & Bratislava, There are indications that European Central Bank will upgrade their growth forecasts for the euro zone economy when new numbers are published next month, ECB Governing Council member for Slovakia Ivan Sramko said to Reuters.

"There is some news now that there will be a better forecast for this year and next year but this is all I can say," Sramko, governor of Slovakia's central bank, said on the sidelines of an Austrian central bank conference in Vienna.

Sramko, asked about the exchange rate of the euro against the U.S. dollar and the Chinese yuan, said that it was his personal opinion that policymakers should coordinate more on foreign exchange rates.

He also said the ECB has discussed which interest rate to put on its December tender of 12-month liquidity "many times" but declined to be drawn on those discussions

forecasts for the region and Slovakia

Comment on EBRD forecasts for the region and Slovakia in the Financial Times:


"The countries with fixed exchange rates, including Latvia, face difficulties because they must adjust their real exchange rates through domestic wages and prices. States that started the crisis in good shape and are internationally competitive, such as Poland, Slovakia and Slovenia, could see GDP growth of 2-5 per cent next year. But Hungary, with a difficult fiscal position, is forecast to remain in recession"

Meanwhile in the ever-confident anglo-sphere (again from the FT)

"After the shock came the arguments. No one expected the Office for National Statistics to say the economy shrank by 0.4 per cent in the third quarter; the survey data and early official data had been too strong.

Few were therefore minded on Friday to modify their entrenched positions about the UK economy, the policies needed to revive it or whether the figures contained any useful information. Stuck in the middle of these clashes, of course, was the ONS.

Its preliminary data on gross domestic product are an attempt to provide an early snapshot of economic performance. The downside is that its coverage is limited, with this first estimate based on only 40 per cent of the total hard data on output and nothing on spending or incomes.

George Osborne, the shadow chancellor, said: "This is deeply disappointing news. Britain is now in the deepest and longest recession in its modern history. Britain's economy is still shrinking a full six months after France and Germany started growing."

Meanwhile, economists agreed that the GDP figures made it more likely that the Bank of England would extend its efforts to create money and pump it into the economy in November by expanding the £175bn programme of asset purchases known as quantitative easing.

Yet the most vociferous arguments took place in the City, where analysts clashed over the importance of the figures.

Danny Gabay of Fathom Financial Consulting insisted the appropriate reaction was far greater caution about predicting recovery.

"The UK has some formidable headwinds, not least of which is the over-burdened consumer which is having to cope with a broken banking system, rising unemployment, and falling income growth," he said.

This view was described as "baloney" at Goldman Sachs, which put greater weight on more optimistic recent surveys of companies. Analysing the accuracy of the past decade's preliminary GDP figures, Kevin Daly, Goldman Sachs economist, concluded that they contained "no statistically useful information about growth" because they were so heavily revised, often years after the event.

Setting the record straight

FT: Apathy rules again in Slovakia

By Jan Cienski

Published: June 8 2009 03:00 | Last updated: June 8 2009 03:00

Slovakia appeared to be on track to maintain its record as one of the EU's least enthusiastic members, with only 19.6 per cent of Slovaks taking part in the European elections, which were won by the Smer party of Robert Fico, prime minister. However, the turnout is higher than five years ago, when 17 per cent of Slovaks voted. Jan Cienski, Warsaw

this is complete rubbish, Slovaks feel that they do not know much about these elections and they therefore do not vote in them.

Most Slovaks are VERY pro-european andvery enthusiastic about europe, including travellign and doing business with their neighbours.

I really think that this kind of thing needs to be explained in schools so families understand what EU elections are all about.

Most Slovaks feel that the national government has a big task in steering the country during the global crisis and for the most part things are holding steady in Bratislava. The EU cannot effect the global crisis in any direct way so people focus on keeping their jobs.

The ruling smer marty did well in the election, it is a very pro-EU party, even more than the opposition, and for now the country's consensus seems to be settled on a slightly left stance to maintain cohesion during the crisis.

Slovak banks are healthy and well capitalised, in some ways the healthiest in europe. Slovak's do not have indebtedness and live within their means.

oldie but goodie, british policy on the EU

oh dearism

The spending power of Slovak citizens rises by 20%

The spending power of Slovak citizens rose by 20 percent for the whole of 2008,far more than in its three Visegrad. Four neighbours, according to the GfK research company. The figure in euros was 6,102 euros per person, or 184,000 Slovak crowns, including state benefits and pensions. The figures place Slovakia in 26th position out of all 41 European states, the agency said. Poland saw an increase in its citizens’ spending power of 13 percent, the Czech Republic 12 percent, and Hungary just two percent.

The Czech Republic ranked 23rd and Slovenia 21st. Lichtenstein
occupied first place, and Luxembourg and Switzerland second and third, with Moldova at the bottom of the ladder.

This confirms the rise of Slovakia to the status of an average EU country in terms of wealth and prosperity.

tellBarroso.eu! and european economic recovery in 2010

I came accross this initiative of the EU who wants to hear what you want the EU to do in the future. Its quite bried and open.
check out tellBarroso.eu!

How can the EU improve your life?

In an effort to respond to European citizens opinion and priorities, tellBarroso.eu offers you the opportunity to participate in European decision making and constructing the future.

José Manuel Barroso

European Union recovery and the likelihood of this happening soon
by the top economist of Deutsche Bank

James Baker on the crisis and how to bail banks on the USA




Some interesting quotes:

"The situation is much more serious than any other financial crisis since the end of World War II."

AP

George Soros

"I no longer believe in the self-healing power of the market."

DDP

Josef Ackermann,
CEO of Deutsche Bank

Quotes and calls that have proven very wrong

"One thing is for certain, we're in challenging times. But another thing is certain: We've taken strong, decisive action. ... The United States is on top of the situation."

March 17, 2008

REUTERS

George W. Bush,
then President of the United States (and monkey extraordinaire)

"There will probably be some bank failures. There are some small ... banks that have heavily invested in real estate in locales where prices have fallen. Among the largest banks, the capital ratios remain good, and I don't expect any serious problems among the larger banks."

February 28, 2008

REUTERS

Ben Bernanke,
Chairman of the Federal Reserve

"The outlook for the 2008 budget is excellent."

March 19, 2008

DDP

Angela Merkel (CDU),
German Chancellor, according to a spokesperson

"I am not suggesting that more regulation is the answer, or even that more effective regulation can prevent the periods of financial market stress that seem to occur every five to 10 years."

March 31, 2008

AFP

Henry Paulson,
then US Treasury Secretary, according to a speech manuscript

James Baker's take

How Washington can prevent ‘zombie banks’

By James Baker

Published: March 1 2009 19:38 | Last updated: March 1 2009 19:38

Beginning in 1990, Japan suffered a collapse in real estate and stock market prices that pushed major banks into insolvency. Rather than follow America’s tough recommendation – and close or recapitalise these banks – Japan took an easier approach. It kept banks marginally functional through explicit or implicit guarantees and piecemeal government bail-outs. The resulting “zombie banks” – neither alive nor dead – could not support economic growth.

A period of feeble economic performance called Japan’s “lost decade” resulted.

Unfortunately, the US may be repeating Japan’s mistake by viewing our current banking crisis as one of liquidity and not solvency. Most proposals advanced thus far assume that, once confidence in financial markets is restored, banks will recover.

But if their assumption is wrong, we risk perpetuating US zombie banks and suffering a lost American decade.

Evidence – a mountain of toxic assets, housing market declines, a sharp economic recession, rising unemployment and increasing taxpayer exposure through guarantees, loans, and infusion of capital – strongly suggests that some American banks face a solvency problem and not merely a liquidity one.

We should act decisively. First, we need to understand the scope of the problem. The Treasury department – working with the Federal Reserve – must swiftly analyse the solvency of big US banks. Treasury secretary Timothy Geithner’s proposed “stress tests” may work. Any analyses, however, should include worst-case scenarios. We can hope for the best but should be prepared for the worst.

Next, we should divide the banks into three groups: the healthy, the hopeless and the needy. Leave the healthy alone and quickly close the hopeless. The needy should be reorganised and recapitalised, preferably through private investment or debt-to-equity swaps but, if necessary, through public funds. It is time for triage.

To prevent a bank run, all depositors of recapitalised banks should be fully guaranteed, even if their deposit exceeds the Federal Deposit Insurance Corporation maximum of $250,000 (€197,000, £175,000). But bank boards of directors and senior management should be replaced and, unfortunately, shareholders will lose their investment. Optimally, bondholders would be wiped out, too. But the risk of a crash in the bond market means that bondholders may receive only a haircut. All of this is harsh, but required if we are ultimately to return market discipline to our financial sector.

This is not a call for nationalisation but rather for a temporary injection of public funds to clean up problem banks and return them to private ownership as soon as possible. As president Ronald Reagan’s secretary of the Treasury, I abhor the idea of government ownership – either partial or full – even if only temporary. Unfortunately, we may have no choice. But we must be very careful. The government should hold equity no longer than necessary to restructure the banks, resume normal lending and recoup at least a portion of taxpayer investment.

After replacing bank management with new private managers, the government should have no say in banks’ day-to-day operations.

The FDIC can assist. Just this year, it has placed more than a dozen American banks – admittedly all small – into receivership. We might also consider setting up something akin to the Resolution Trust Corporation, created in 1989 to liquidate the assets of failed savings and loans. The RTC eventually disposed of almost $400bn in assets of more than 700 insolvent thrifts.

To avoid bank runs and contain market disruption, the Treasury should announce its decisions at one time. Washington will also need to co-ordinate its actions with other major capitals, especially in western Europe and east Asia. At best, this will encourage other countries to take similar steps with their own banking systems. At a minimum, other governments can prepare for the financial turmoil associated with the announcement.

This approach is not pretty or easy. It will cost a lot of money, with the lion’s share coming from US taxpayers, at least in the short to medium term. But the alternative – a piecemeal pumping of more public money into insolvent banks in the vague hope that things will improve down the road – could truly be historic folly.

Eventually our banks and economy will start to recover. When they do, we would be wise to avoid another Japanese mistake – raising taxes. To counter mounting debt created by government stimulus packages, Japan increased taxes in 1997. Consumption dropped and the country’s economy collapsed.

Our ad hoc approach to the banking crisis has helped financial institutions conceal losses, favoured shareholders over taxpayers, and protected senior bank managers from the consequences of their mistakes. Worst of all, it has crippled our credit system just at a time when the US and the world need to see it healthy.

Many are to blame for the current situation. But we have no time for finger-pointing or partisan posturing. This crisis demands a pragmatic, comprehensive plan. We simply cannot continue to muddle through it with a Band-Aid approach.

During the 1990s, American officials routinely urged their Japanese counterparts to kill their zombie banks before they could do more damage to Japan’s economy. Today, it would be irresponsible if we did not heed our own advice.

The writer was chief of staff and Treasury secretary for President Ronald Reagan and secretary of state for President George H.W. Bush

Why is Germany not willing to spend so much to stimulate the economy?

Many people reading US financial press are aghast as to why the europeans are not stepping on the accelerator of funding the banks to keep them solvent. However there is a hidden grand game/drama being played out in all of this. The elite in the USA and the UK is more concerned to maintain the financial elite and the control of the governmental agenda by the priorities of business as well as achieve reflation, but only if the first condition is met, and they are seem to be prepared to risk everything in pursuing no harm comes to shareholders or the pecking order in US politics and economics.

In europe the germans disagree with this approach and they favour a european approach that punishes those that took huge risks tehrefore it does not bail out irresponsible behaviour.
This was tried successfully in Sweden in the early 90s.
It is described below:
(by Hans-Werner Sinn
Professor of Economics and Public Finance at the University of Munich, President of Ifo Institute for Economic Research and Director of CES)

Governments must control the banks during the cure

Keynes must save the banks and the economy. To do this, the state needs to have ownership rights in the afflicted banks. The banks cannot be allowed to shrink themselves back to health (rather than accepting money from the state) because the economy would shrink to death.

My proposal is that any bank that does not find enough capital from the market to shore up its balance sheet with at least 4% equity capital and a tier-one ratio of 8% (core capital relative to risk weighted assets), on average for the past three years, must let the state supply the required capital and become a partner. I call this the stuffing-of-the-goose strategy.

Long-term and short-run goals coincide here, because only with fresh capital will the banks begin to trust each other again. As things now stand, the capital can only come from the state, there is no alternative to partial nationalisation. Partial nationalisation is not expropriation but a forced issue of new shares to increase the bank’s capital. There is no objection to the old stockholders remaining on board. But the bank must sell the state so many new shares, at prevailing market rates, until the required equity ratios are reached. The old shareholders should not have the right to block this if the conditions do not suit them. What their investment is still worth will be seen in the stock market and not in the balance sheet. And before the state is awarded its share, the new stocks should be offered on the stock market at the planned price. Then no one can claim to have been treated unfairly.
Governments make poor bankers

Of course, banks should not become government agencies. The state has deeper pockets, to be sure, but it is a bad banker. The private legal form must be maintained because the state will have to sell back its shares when the crisis is over, hopefully at some profit.

The bad bank, however, is a bad idea. It only makes sense if the state pays more for assets than the market is willing, but then the state would be giving away taxpayers’ money. To prevent taxpayers from being cheated, nationalisation must precede the creation of a bad bank. That was the Swedish remedy, and it worked. President Obama’s plan also amounts to giving money to the stockholders. The $1 trillion that is to be paid as a “scrapping” bonus for toxic assets is about as high as the capital reserves of the entire US banking system. Hedge funds will receive a sizeable portion. No wonder the stock market rallied. Wall Street has managed to prevail again.
After the banks are saved

When the banks are saved, Eucken can take over. The most important ordoliberal rule would be to require considerably higher capital reserves. This ought to be the key strategy for the recovery of the banks, because it would increase the liability of the stockholders. Higher capital reserve requirements help better cushion shocks and induce a more cautious approach to risk-taking. They would also bring about a change in management compensation systems.

Basel II also needs to be overhauled. Today the banks’ assets are reduced computationally to a fraction of the balance sheet total, and the core capital ratio leads us to believe that the equity-asset ratio is up to five times larger than it actually is. This institutional monkey business has to stop. Basel III must mandate fair weights for risk-weighted assets that make the banks’ risk-weighted assets on average as large as the balance-sheet total. Only then will we again have a sound banking system. And we need not fear that capital will be lacking if more capital reserves must be held. The savings in an economy are always sufficient to finance investments, whether they are transferred to the firms in the form of owner’s equity or loan capital.
The need for international harmonisation

All of the regulations for the new banking system must be harmonised internationally, because otherwise countries will relax their regulations to undercut each other. Without harmonisation, there would again be a race to the bottom for where banks decide to do business. Then we would be right back where we started.

In Europe, the ECB must take over banking supervision. In Germany, BaFin, the Federal Financial Supervisory Authority, must be subject to the Bundesbank and not the Finance Ministry. This is the only alternative. The necessary international umbrella organisation can be formed by the IMF or the UN. This is a solution that the Anglo-Americans should also be able to accept at the World Financial Summit, since both organisations are headquartered in America.

Editor-in-Chief’s note: This was first published in German as “Stragegie der Stopfgans” , WirtschaftsWoche, No.14, 30 March 2009, p. 40. Reposted with permission.

Euro zone economic contraction slows accrding to euronews

There’s been a little bit of good news on the euro zone economy.

The latest data suggests a slight easing in the region’s economic contraction in March. That was not expected by financial analysts.

The Flash Euro zone Purchasing Managers Index shows activity in the services and manufacturing sectors still falling but at a slower rate.

Even so, companies coping with sinking demand and the reluctance of banks to lend continued to slash jobs to cut their costs.

Bonuses for American financiers are in the firing line, and other news | The week ahead | The Economist

This model of society organisation is bankrupt ethically as well as financially, but even more so from an efficiency point of view. Failure and incompetence is rewarded. Boom and bust is rewarded.
We need to change all that in every country.

"BONUSES paid to employees at AIG, a big insurer rescued by America’s government, will stay under the spotlight. Public outrage and lawmakers' anger have steadily mounted as it has become clear that executives will share $165m in bonus payments, even after AIG received $170 billion of aid to keep it afloat. On Monday March 23rd the Senate will consider a House proposal to tax bonuses awarded to financiers at insitutions in receipt of bail-out cash at 90%. The next day the House Financial Services Committee will grill both Ben Bernanke, chairman of the Federal Reserve, and Tim Geithner, the Treasury secretary, over AIG's bail-out and bonus packages. Mr Geithner is under particular pressure, not only because of AIG’s bonuses but his botched unveiling of a bank-rescue plan."

The crisis explained

how the crisis will affect everyone and who created it.

Happily in Slovakia the value of all mortgage loand is only 17% of Slovak GDP
in the UK its well over 350% of UK GDP



The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.