34,000 more out of work in Eurozone

BRUSSELS: Unemployment in the eurozone remained at record highs in August and the number of people out of work climbed again, highlighting the human cost of the bloc's three-year debt crisis.

Joblessness in the 17 countries sharing the euro was 11.4% of the working population in August, which was stable compared with July on a statistical basis, but another 34,000 people were out of work in the month, the EU's statistics office Eurostat said yesterday.

That left 18.2 million people unemployed in the eurozone, the highest level since the euro's inception in 1999, while 25.5 million people were out of a job in the wider 27-nation European Union, Eurostat said.

The debt crisis that began in Greece in 2010 and has spread across the eurozone to engulf Ireland, Portugal, Cyprus and the much bigger economy of Spain has devastated business confidence and sapped companies' abilities to create jobs.

A European-wide drive to cut debts and deficits to try to win back that lost confidence has led governments to cut back spending and lay off staff, while stubbornly high inflation and limited bank credit are adding to household's problems.

Joblessness could go beyond 19 million by early 2014, or about 12% of the eurozone's workforce, according to a new study by consultancy Ernst & Young, predicting that rate to rise to 27% in indebted Greece. That compares with 24.4% in the country in June, the latest data available.

“In this difficult environment, companies are likely to reduce employment further in order to preserve productivity and profitability,” the report said.

Eurozone manufacturing put in its worst performance in the three months to September since the depths of the 2008/2009 financial crisis, with factories hit by falling demand despite cutting prices, a survey showed yesterday.

The International Monetary Fund expects the eurozone's economy to shrink 0.3% this year and only a weak recovery to emerge next year that will generate 0.7% growth.

But the joblessness picture also obscures wide regional variations. In Austria, unemployment is the eurozone's lowest at 4.5% in August, a slight fall from July, while Spain has the highest rate at 25.1% in the month.

While a bursting of a real estate bubble in Spain and the end of a decade of credit-fuelled expansion in Greece account for difficulties in the Mediterranean, policymakers still face the challenge of trying to revive growth across the bloc.

“The recession in the eurozone is due to the tough consolidation course in the peripheral countries, weaker global demand and the high uncertainty coming from the sovereign debt crisis,” Commerzbank economist Christoph Weil wrote in a recent research note.

Eurozone and UK central bankers will likely leave policy unchanged at their meetings this week, but both will announce additional measures to help their moribund economies before the year's end, according to a poll. - Reuters

Debt crisis in Europe will affect rest of the world

The economic crisis in Europe is deepening and may get worse, with worrisome effects on the rest of the world.

Eurozone crisis: high-stakes gamble as David Cameron warns Greek voters.

David Cameron and European Commission president José Manuel Barroso talk before a session at the Nato summit in Chicago. Photograph: Pablo Martinez Monsivais/AP

THE economic situation in Europe has worsened considerably in the past week, giving rise to a very worrisome situation.

The ramifications of a full-blown crisis are serious not only for Europe but also the rest of the world.

The recent Greek elections saw the citizens proclaiming their anger towards the austerity policies tied to the European-IMF bail-out package, by repudiating the two major parties and giving the small anti-austerity Syriza party second place.

The elections came in the midst of a greatly deteriorating condition. Greece has 22% unemployment, 50% youth unemployment, GNP is falling steeply, and public debt will remain high at 160% of GDP next year despite the recent bailout and debt-restructuring measures.

The leader of Syriza, Alexis Tsipras, who swept to the forefront of Greek politics on the wind of protest against the austerity measures imposed by creditors, wants to re-negotiate the terms of the bailout.

He thinks his insistence on this will eventually force the creditors to change the terms, with Greece remaining in the Eurozone.

But many analysts think that the response to this demand from the EU and IMF would be to stop further loans and force Greece to exit the Euro. In a second election in mid-June, Syriza is expected to do even better and a messy Greek loan default and Euro exit are now seen as more than just possible.

In a Eurozone exit, Greece would re-introduce a local currency, and after Greeks change from their Euros, a depreciation of the new currency is expected to happen.

News report indicate that some capital flight from Greece is already taking place, as Greeks fear that their present Euro-denominated assets would lose value after conversion to the local currency.

Meanwhile, Spain was last week desperately trying to avoid a run on banks after the government was forced to partly nationalise Bankia, the second largest bank, followed by rumours of such a run.

The value of bad loans held by the banking sector rose one third in the past year to 148 billion Euro and Moody’s downgraded the credit rating of many Spanish banks.

The Spanish finance minister Luis de Guindos said the battle for the Euro is going to be waged in Spain, implying his country is now in front in trying to prevent the Greek crisis from infecting other European countries and bringing down the Euro.

The spreading crisis throws into doubt the policies in most European countries that have in recent years focused on drastically cutting government spending to reduce the budget deficit in an attempt to pacify investors and enable a continued flow of loans.

This reversed the coordinated policy of fiscal reflation that the G20 leaders agreed on in 2009 to counter the global crisis. It contributed to the rapid recovery.

Since then economists and politicians alike have been debating the merits of Keynesian reflationary policies versus a resumption of IMF-type fiscal austerity.

The movement towards recession in Europe as a whole and deep falls in GNP in bail-out countries like Greece has boosted the arguments of the Keynesians.

But key leaders such as Angela Merkel of Germany and David Cameron of Britain are still convinced of the need to stick to austerity.

The victory of the new French President Francois Hollande and the stunning polls performance of the Syriza party in Greece indicate that the public wind has shifted radically against austerity, and that a change may be on the cards.

The stopping of loans to Greece would lead to an economic collapse, with government debt default, bank runs, re-denomination of local contracts to local currency and default on external contracts denominated in euro, in a scenario painted by Wolf.

A Greek exit could trigger bank runs and capital flight in Portugal, Ireland, Italy and Spain and beyond, causing collapse in asset prices and large GNP falls.



A decisive European response is needed, such as the European Central Bank providing unlimited loans to replace money taken out in bank runs, capping of interest rates on sovereign debt, Eurobonds and abandoning austerity-centred policies.

But if these policies are not taken, the Eurozone may disintegrate, with one study suggesting GNP falls on 7% to 13% in various countries, and if a full Eurozone break up takes place there could be a freeze in the financial system, a collapse in spending and trade, many lawsuits and Europe facing a situation of political limbo.

The impact on the world would be worse than the Lehman collapse. Though the implication is that this should not be allowed, a Greek exit would greatly increase the likelihood of these dangers.

If Greece leaves, the Eurozone will have to change fundamentally but if that is impossible, large crises will be repeated in a nightmare.

There would have to be a choice between a stronger union of European countries (which many do not like) or endless crises in future, or a break up now. No good choices exist, concludes Wolf.

The scenarios and predictions detailed above in the Wolf article are pessimistic, but may also be realistic not only because of the current economic situation, but also the apparent lack of conditions for a political solution.

Watching from the sidelines, with no ability to influence developments, many in the developing countries are disturbed by the turn of events. It will likely lead to a weakening of the global economy at best and a full blown crisis at worst, with the developing countries at the receiving end in terms of trade downturn, financial reverberations, and declining incomes and jobs.

It is apparent, once again, that a global forum should exist where all countries can discuss developments in the global economy and contribute their views on what needs to be done.

In the inter-connected world, policies and events in one part (especially in the core countries) affect all others.

 

 Global Trends By MARTIN KHOR

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Eurozone unemployment hits record 10.9% as manufacturing slumps to recession!

Eurozone unemployment hit a record in March, with Spain's 24.1% rate setting the pace.

NEW YORK (CNNMoney) -- Unemployment in the eurozone rose to 10.9% in March, another sign of the broad economic weakness and possible recession across the continent.

The unemployment rate across the broader 27-nation European Union remained at 10.2% in March, according to a organization report Wednesday.

10 largest economies

But the 17-nation eurozone unemployment edged up from 10.8% in February. The EU and eurozone rates are the highest since the creation of the common euro currency in 1999.

There are now 13 nations in Europe struggling with double-digit percentage unemployment, led by a 24.1% rate in Spain, which was a record high, and 21.7% in Greece.

The rising jobless rates are primarily blamed on the ongoing European sovereign debt crisis, which has forced governments to take tough austerity measures to cut spending.

Europe's next recession risk: Germany

There are 12 countries in Europe that have had two or more consecutive quarters in which their gross domestic product has dropped -- a condition many economists say define a recession. Nine of the countries are in the eurozone, and three use their own currency.

The United Kingdom, which had an 8.2% unemployment rate in its most recent reading, is the largest economy now in recession.

The entire EU and and eurozone are widely believed to be in recession as well, a fact likely to be confirmed when their combined GDPs are reported on May 15.

Even some of the healthier countries in Europe are likely to meet that criteria, including Germany, the EU's largest economy and one in which unemployment is 5.6%, the fourth-lowest rate on the continent.

German GDP declined 0.2% in the fourth quarter and many economists are forecasting another drop in the first quarter, suggesting Germany could be in recession soon.



By contrast to Europe, the U.S. unemployment rate has been steadily falling, reaching 8.2% in March. The jobless rate here reached a 26-year high of 10.0% in October 2009, but it has declined in six of the last seven months, shaving almost a full percentage point off the 9.1% rate of last August.

Economists surveyed by CNNMoney forecast that the rate will stay unchanged in the April jobs report this Friday, while hiring is expected to pick up to a gain of 160,000 jobs

By Chris Isidore @CNNMoney, Newscribe : get free news in real time

Eurozone manufacturing heads towards recession

 

(BRUSSELS) - Gloom over eurozone manufacturing deepened in April, highlighting the impact of policies to control budgets and signalling recessionary pressures, a Markit survey showed on Wednesday.

A key index of activity based on a survey by Markit fell to almost the lowest level for three years.

Markit publishes closely watched leading indicators of economic activity and in its latest survey for its purchasing managers' index the firm said: "The eurozone manufacturing downturn took a further turn for the worse in April."

The adjusted manufacturing PMI figure, closely watched as an indicator of economic trends, fell to 45.9 from 47.7 in March.

A figure of below 50 points to contraction and Markit noted that "the headline PMI has signalled contraction in each of the past nine months."

The chief economist at Markit, Chris Williamson, said: "Manufacturing in the eurozone took a further lurch into a new recession in April, with the PMI suggesting that output fell at (a) worryingly steep quarterly rate of over 2.0 percent."

He said that "austerity in deficit-fighting countries is having an increasing impact on demand across the region" and that "even German manufacturing output showed a renewed decline."

Williamson commented that the latest forecast from the European Central Bank "of merely a slight contraction of GDP (gross domestic product) this year is therefore already looking optimistic."

He added: "However, with the survey also showing inflationary pressures to have waned, the door may be opening for further stimulus."

His remarks highlight controversy over policies in many countries to correct budget deficits and heavy debt to install confidence on debt markets where governments borrow.

There are increasing warnings that the eurozone must raise economic growth, but opinions differ on the best route, with some saying that budget austerity opens the way to structural reform and competitiveness and others saying that extra stimulus is essential.

Markit said that "the April PMIs also indicated that manufacturing weakness was no longer confined to the region's geographic periphery."

In Germany, which has the biggest economy in the eurozone and has shown broad resilience to downturn elsewhere, Markit also noted a setback.

"The German PMI fell to a 33-month low, conditions deteriorated sharply again in France and the Netherlands also contracted at a faster rate," it said.

Markit said: "There was no respite for the non-core nations either, with steep and accelerating downturns seen in Italy, Spain and Greece. Only the PMIs for Austria and Ireland held above the 50.0 no-change mark."

Markit said that manufacturers reported weak demand from clients inside and outside the zone and this had hit even German companies.

The worsening outlook for eurozone manufacturing was also affecting the job market, Markit said, just as eurozone data put the unemployment rate at a record high level.

In manufacturing "job losses were reported for the third straight month in April, with the rate of decline the sharpest in over two years," Markit said on the basis of its survey. - AFP.

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Unemployment Fuels Debt Crisis

Job-seekers wait outside a job center before opening in Madrid, Spain. Spain’s jobless rate has more than doubled since 2008 after the collapse of a real estate market that fueled a decade of economic growth. Photographer: Angel Navarrete/Bloomberg

Surging unemployment rates from Spain to Italy and Greece are threatening efforts to quell the region’s debt crisis and keeping bond yields close to record premiums relative to benchmark German bunds. 

Joblessness is soaring as European nations reduce spending, igniting strikes and protests from Athens to Madrid. Unemployment in Spain surged to almost 24 percent, pushing the euro-region level to 10.8 percent in February, the highest in more than 14 years. Italy’s rate is at 9.3 percent, the most since 2001, hampering efforts to spur economic growth.

Deepening recessions in Italy and Spain contributed to a five-week slide in Italian and Spanish bonds as the shrinking tax base helped lead to both countries raising their deficit targets. The yield premium investors demand to hold Spanish 10- year debt over German bunds reached a four-and-a-half-month high this week.

“The higher the jobless rate, the more that has to be spent on benefits, creating the potential for a negative spiral,” said Christian Schulz, an economist at Berenberg Bankin London and a former ECB official.

Berenberg Bank predicts euro-region unemployment will peak at 11.5 percent in September, he said.

The extra yield investors demand to hold Spanish 10-year bonds rather than similar-maturity German securities was 411 basis points yesterday, compared with an average 130 during the past five years. The rate has risen more than 80 basis points this year. The spread was 376 basis points for Italy and 1,072 basis points for Portugal.

Youth Joblessness

Spain’s jobless rate has more than doubled since 2008 after the collapse of a real estate market that fueled a decade of economic growth. The country is now home to more than one third of the euro-region’s jobless and more than half of young people are out of work.

Hundreds of thousands of Spaniards protested on March 29 in a general strike against Prime Minister Mariano Rajoy’s overhaul of labor market rules and the deepest budget cuts in at least three decades that are pushing the economy deeper into its second recession since 2009.

“Spain faces formidable challenges, especially concerning youth unemployment,” European Union Economic and Monetary Affairs Commissioner Olli Rehn told lawmakers at the European Parliament in Strasbourg Wednesday.

Italy’s jobless rate rose to the highest in more than a decade in February and the International Monetary Fund forecast on April 17 that unemployment will reach 9.9 percent this year. Italian bonds reversed morning gains yesterday after the government cut its growth forecasts and abandoned a goal to balance the budget next year.

Estimate Revisions

Italy’s gross domestic product will contract 1.2 percent this year, more than twice the previous forecast, and the deficit will end next year at 0.5 percent, more than the 0.1 percent previously forecast. The Italian announcement came six weeks after Rajoy abandoned Spain’s deficit goal for next year.

Joblessness in both countries may worsen as the recession deepens and rigid labor market laws are overhauled. Rajoy passed in February a plan to make it cheaper for employers to let workers go, while Italy gave companies more leeway to fire workers without fear of court-ordered reinstatements.

“High unemployment means a very dissatisfied electorate and makes it difficult to get stuff done,” said Padhraic Garvey, head of developed market debt at ING Groep NV in Amsterdam. “It makes it significantly more difficult to pass austerity measures and exacerbates a difficult situation.”

Rajoy’s Challenges

Rajoy probably will face further unrest if he’s forced to implement more budget cuts to meet ambitious deficit goals. His government has now pledged to reduce the shortfall to 5.3 percent of GDP in 2012 from 8.5 percent in 2011 and by more than 2 percentage points next year to get within the EU’s 3 percent limit. Despite a raft of austerity last year, the country achieved a deficit reduction of less than 1 percentage point.

Falling joblessness in Germany underscores the widening gap between the resilience of the euro-region’s largest economy and the so-called periphery. The nation’s adjusted jobless rate slipped in March to a two-decade low of 6.7 percent, according to the statistics office. While the 17-member euro-region economy will shrink 0.4 percent in 2012, Germany’s economy probably will grow 0.7 percent, according to economists’ forecasts compiled by Bloomberg.

“The divergence between Germany and the other economies is here to stay,” said Christoph Rieger, head of interest-rate strategy at Commerzbank AG in Frankfurt. “It provides a structural reason for spreads to stay wider, regardless of what other progress is made on containing the crisis.”

Greek Elections

In Greece, where official data showed unemployment climbed to 21 percent in January, elections scheduled for May 6 may produce a hung parliament, raising questions about the nation’s ability to implement its austerity measures. The nation’s 2 percent bond due in February 2023 trades at about 25 cents on the euro.

In Portugal, where the government forecasts the unemployment rate will average 13.4 percent this year, up from 12.7 percent in 2011, Soares da Costa SGPS SA, Portugal’s third- biggest publicly traded construction company, said it’s expanding abroad and eliminating jobs at home, where it faces a slump in government infrastructure spending. 

“High and rising unemployment is likely to impact at a political level and may make the reforms more difficult to undertake,” said Eric Wand, a fixed-income strategist at Lloyds Banking Group Plc in London. “If the political desire to reform comes in to doubt, then the market wouldn’t like that. There’s good scope for the crisis to get worse in the near term, the economies are still on pretty shaky ground and there’s a lot of political risk.”

By Daniel Tilles at dtilles@bloomberg.net.

Moody's declares Greece in default of debt

Bond credit rating agency says EU member has defaulted on its repayments as it secures biggest debt deal in history.



Moody's Investors Service has declared Greece in default on its debt after Athens carved out a deal with private creditors for a bond exchange that will write off $140 billion of its debt.

Moody's pointed out that even as 85.8 per cent of the holders of Greek-law bonds had signed onto the deal, the exercise of collective action clauses that Athens is applying to its bonds will force the remaining bondholders to participate.

Overall the cost to bondholders, based on the net present value of the debt, will be at least 70 per cent of the investment, Moody's said.

"According to Moody's definitions, this exchange represents a 'distressed exchange,' and therefore a debt default," the US-based rating firm said.

For one, "The exchange amounts to a diminished financial obligation relative to the original obligation."

Secondly, it "has the effect of allowing Greece to avoid payment default in the future."

Ahead of the debt deal, Moody's had already slashed Greece's credit grade to its lowest level, "C," and so there was no impact on the rating.

Moody's said it will revisit the rating to see how the debt writedown, and the second Eurozone bailout package, would affect its finances.

However, it added, at the beginning of March "Moody's had said that the risk of a default, even after the debt exchange has been completed, remains high."

Source: Agencies  Newscribe : get free news in real time

Europeans migrate south as continent deepens into crisis

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Helen Pidd in Berlin guardian.co.uk

Tens of thousands of Irish, Greek and Portuguese people leave in search of a new life as the eurozone's woes worsen

Gaelic sportsman Mick Hallows of the Roundtowers club in Clondalkin, Dublin who has emigrated to Australia because of a lack of work in Ireland. Photograph: Kim Haughton

Since its conception, the European Union has been a haven for those seeking refuge from war, persecution and poverty in other parts of the world. But as the EU faces what Angela Merkel has called its toughest hour since the second world war, the tables appear to be turning. A new stream of migrants is leaving the continent. It threatens to become a torrent if the debt crisis continues to worsen.

Tens of thousands of Portuguese, Greek and Irish people have left their homelands this year, many heading for the southern hemisphere. Anecdotal evidence points to the same happening in Spain and Italy.

The Guardian has spoken to dozens of Europeans who have left, or are planning to leave. Their stories highlight surprising new migration routes – from Lisbon to Luanda, Dublin to Perth, Barcelona to Buenos Aires – as well as more traditional migration patterns.

This year, 2,500 Greek citizens have moved to Australia and another 40,000 have "expressed interest" in moving south. Ireland's central statistics office has projected that 50,000 people will have left the republic by the end of the year, many for Australia and the US.



Portugal's foreign ministry reports that at least 10,000 people have left for oil-rich Angola. On 31 October, there were 97,616 Portuguese people registered in the consulates in Luanda and Benguela, almost double the number in 2005.

The Portuguese are also heading to other former colonies, such as Mozambique and Brazil. According to Brazilian government figures, the number of foreigners legally living in Brazil rose to 1.47 million in June, up more than 50% from 961,877 last December. Not all are Europeans, but the number of Portuguese alone has jumped from 276,000 in 2010 to nearly 330,000.

Gonçalo Pires, a graphic designer who has swapped Lisbon for Rio de Janeiro, said: "It's a pretty depressing environment there [in Portugal]." In Brazil, by contrast, "there are lots of opportunities to find work, to find clients and projects".

Joy Drosis, who left her Greek homeland for a life in Australia, expressed similar motives.  "I had to do something. If I had stayed in Greece, we were all doomed," she said. "I'm lucky that I can speak the language: many others can't."

The key moment in this southerly migration may have come last month, when the Portuguese prime minister, Pedro Passos Coelho, made a humbling visit to Angola, begging for inbound investment. Just 36 years after the end of Portuguese colonial rule in Angola, its president was ready to show mercy.

"We're aware of the difficulties the Portuguese people have faced recently," said José Eduardo dos Santos. "Angola is open and available to help Portugal face this crisis."

But the Portuguese making this move will not have it easy: life expectancy in Angola is still just 39, compared with 79 in Portugal, and crime is rife.

In Ireland, where 14.5% of the population are jobless, emigration has climbed steadily since 2008, when Lehman Brothers collapsed and the bottom fell out of the Irish housing market. In the 12 months to April this year, 40,200 Irish passport-holders left, up from 27,700 the previous year, according to the central statistics office. Irish nationals were by far the largest constituent group among emigrants, at almost 53%.

The Guardian spoke to one Dublin under-19s football and hurling club that had lost eight out of 15 players in the past 18 months. Most of the nascent sports stars had headed to Australia. Experts believe the exodus will increase, given the £1.4bn tax rises and austerity measures just announced. The thinktank the Economic and Social Research Institute (ESRI) forecast this month that 75,000 people would emigrate from Ireland in 2012 .

For departing Greeks the top destinations over the years, according to the World Bank, have been Germany, Australia, Canada, Albania, Turkey, UK, Cyprus, Israel and Belgium.

Skilled Greeks are particularly likely to leave: as an example of what can happen, 4,886 physicians emigrated in the year 2000 (the last year for which the World Bank's Migration and Remittances Factbook cites data for departing doctors), meaning the country lost 9.4% of its doctors in that single year.

The World Bank gives the number of immigrants living in Greece as about 1.13 million in 2010, around 10% of the population. Most have come, over the years, from poorer countries such as Albania, Bulgaria, Romania and Georgia, it is likely that the majority of new arrivals lack the skills to replace the emigrants.

Additional reporting by Henry McDonald in Dublin, Helena Smith in Athens, Tom Phillips in São Paulo, and Alison Rourke in Sydney 

• This article was amended on 22 December 2011 to delete a sentence reading: "In 2010, 1.21 million people emigrated [from Greece], according to the World Bank, equalling 10.8% of the population." This was actually the total "stock" of Greeks said by the World Bank to be living overseas as of 2010, not the number who emigrated in that year. Also deleted was a reference stating that "1.3 million people arrived [in Greece] in 2011". This was the total "stock" of immigrants said by the World Bank to be living in Greece as of 2010, not the number who arrived in that year. A sentence saying that 4,886 physicians emigrated from Greece in 2010 has been corrected; the year was 2000.

Global recession grows closer as G20 summit fails in disarray, Europe stumbles on through debt fog!

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G20 ends in disarray as Europe stumbles on through debt fog

Greg Keller

The G20 summit ended in disarray without additional outside money to ease Europe's debt crisis and new jitters about Italy clouding a plan to prevent Greece from defaulting.

In Athens, Greece's prime minister survived a confidence vote in parliament early on Saturday morning, calming a revolt in his Socialist party with a pledge to seek an interim government that would secure a vital new European debt deal.

In the end, only vague offers to increase the firepower of the International Monetary Fund - at some later date - were all the eurozone leaders were able to take home Friday after two days of tumultuous talks.

Greece's PM George Papandreou (R) and Finance minister Evangelos Venizelos smile after winning a vote of confidence. Photo: Reuters

With their own finances already stretched from bailing out Greece, Ireland and Portugal - and the United States and other allies wrestling with their own problems - eurozone countries had been looking to the IMF to help line up more financing to prevent the debt crisis from spreading to larger economies like Italy and Spain.

Italy's fate in particular is crucial to the eurozone, because its economy - the third-largest in the currency union - would be too expensive to bail out. The implications for the world economy are stark: The debt crisis that has rocked the 17-nation eurozone threatens to push the world economy into a second recession.

European leaders could point to one potential catastrophe averted: They stared down Greece's prime minister and berated him into scrapping a referendum that threatened their European bailout plan. Greece's politics are in upheaval as a result, but the shaky bailout plan appears back on track - for now.

"We want Europe to work," French President Nicolas Sarkozy said on French TV when the summit was over. "I think today we can have confidence ... but that's not to say our troubles are behind us."

In the end, the Greek question completely derailed Sarkozy's aim of using the summit to show that Europe had sorted out its debt problem once and for all - and possibly convince some of them to pitch in to the rescue effort.

In the space of days, the already shrunken list of goals set out by France to close out its year as head of the G20 was scrapped, replaced by a nearly constant stream of shocking new developments and reversals in Europe's long-running attempt to get control of Greece's debt crisis.

That reality was perhaps best illustrated at the height of the summit on Thursday evening, when hundreds of journalists dropped what they were doing in the basement of Cannes' Palais des Festivals and gathered around television screens to watch a live transmission from the Greek parliament in Athens, where Prime Minister George Papandreou was speaking.

The week of unending drama in Athens horrified its European partners, spooked global markets and overshadowed the summit in Cannes. The threat of a Greek default or exit from the common euro currency has worsened the continent's debt crisis.

When the week started, Europe had finally reached an intricate, ambitious and fragile deal to try to rescue Greece and stop the crisis from spreading any further. The G-20 summit was supposed to solidify and clarify the deal and get the world economy back on the right track.

Then on Monday night, Papandreou shocked his European partners and domestic allies by announcing he would put the plan to a referendum. Markets panicked, as did many of the leaders coming to Cannes.

Sarkozy and German Chancellor Angela Merkel held a series of frenzied meetings, then summoned Papandreou on Wednesday. If you lose this referendum, you could lose the euro, they told him. And they froze a new (euro) 8 billion ($A10.66 billion) loan that Greece will soon need to pay government salaries.

On Thursday, Papandreou backed down and abandoned the referendum. The U-turn left his 2-year-old government teetering.

Now Europe's leaders may find it is impossible to take back the shocking admission by Sarkozy and Merkel that an exit by Greece from the eurozone was no longer unthinkable.

And even as US President Barack Obama, Chinese President Hu Jintao and other leaders struggled to make sense of the Greek drama's fast-shifting plot, another flashpoint emerged in Italy.

Market confidence in Italy's ability to reduce its public debt and spur growth in its anemic economy has withered over recent weeks as the government weakened. MPs have defected to the opposition and some of Prime Minister Silvio Berlusconi's ministers have openly suggested the government's days may be numbered.

Market fears mounted on Friday in the wake of the confusion about Greece. Italy's benchmark 10-year bond yield jumped 0.32 of a percentage point to 6.43 per cent, indicating a surge in investor worries about the country's ability to repay its debts.

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Global recession grows closer as G20 summit fails

Cameron tells eurozone member states to solve their own problems. Link to this videoA world recession has drawn closer after a fractious G20 summit failed to agree fresh financial help for distressed countries and debt-ridden Italy was forced to agree to the International Monetary Fund monitoring its austerity programme.

Financial markets fell sharply after the two days of talks in Cannes broke up in disarray, amid concerns that Italy will now replace Greece at the centre of Europe's deepening debt crisis.

UK hopes that the Germans would relent and allow the European Central Bank to become the lender of last resort for the euro were also dashed.

On a day of unremitting gloom and yet more market turbulence, the Greek prime minister, George Papandreou, won a late-night confidence vote in his parliament after making a speech in which he promised to start powersharing talks to form a caretaker coalition government. Although he won the vote by 153-145, he is now expected to step down and a national unity government is expected to take over in the coming days.

Papandreou said he would visit the country's president on Saturday to launch power-sharing talks "with the [opposition] parties … for the formation of a government of broad co-operation."

In a sign that the spread of the debt crisis to Italy could break up the single currency, the chancellor, George Osborne, admitted the Treasury was undertaking crisis planning for a eurozone collapse.

The G20 deadlock led David Cameron to issue one of his starkest warnings about the impact on the UK economy, saying: "Every day the eurozone crisis continues and every day it is not resolved is a day that it has a chilling effect on the rest of the world economy, including the British economy.

"I am not going to pretend all the problems in the eurozone have been fixed. They have not. The task for the eurozone is the same as going into this summit. The world can't wait for the eurozone to go through endless questions and changes about this.

"We, like the rest of the world, need the eurozone to sort out its problems. We need more to happen in terms of detail on the European firewall."

Cameron hinted at worse to come, describing this as only "a stage of the global crisis".

There had been hopes that the G20 would agree to increase IMF resources by as much as $250bn to more than $1tn, but disagreements about the wisdom of it, structure, size and contributors to the fund left world leaders forced to pass the issue on to a meeting of G20 finance ministers next February.

The French president, Nicolas Sarkozy, had been eager to flourish a figure both to reassure the markets and to top his chairmanship of the G20.

Cameron revealed the friction, saying: "The very worst thing would be to try to cook up a number without being very specific about who is contributing what. If you cannot do that, it is better to say the world stands ready to increase resources to the IMF as necessary."

In the financial markets an early rise in share prices was reversed after it became clear that divisions in the G20 would prevent a deal in Cannes to boost the firepower of the European financial stability facility (EFSF) or the IMF. The yield on 10-year Italian bonds rose from 6.2% to 6.4%, the highest since the euro was founded, raising fears that the country would face problems financing its huge debts.

Obama, under pressure from Congress, was deeply reluctant to contribute to an expansion of IMF funds without clearer signs that the eurozone was sorting out its problems. Admitting that he had been given a crash course in European politics, Obama urged Greek and Italian parliaments to take decisive action to control their deficits and combat what he described as some of the psychological origins of the crisis.

He also urged the euro area to start putting some resources into the EFSF, which Europe hopes to turn into a bailout fund with at least €1tn to deploy.

But the German chancellor, Angela Merkel, said: "There are hardly any countries here which said they were ready to go along with the EFSF."

Berlusconi was summoned to a late-night hotel meeting with Merkel, Sarkozy, the IMF director general, Christine Lagarde, and Obama, where he was told that the IMF was to start monitoring to ensure tough austerity measures are implemented. The measures include changes to the labour market, pension reform and the sell-off of state-owned assets.

Italy has debts of €1.9tn, or 120% of GDP, and if it followed Greece down the path towards a financial bailout, or default, the impact on the European banking system would be vast. Italy faces new tests in further auctions of its debt this month – it has to raise €30.5bn in November and a further €22.5bn in December.

Sarkozy denied that the demands on Berlusconi represented an IMF coup, saying: "We never wanted to change governments, either in Greece or in Italy. That is not our role, that is not our idea of democracy, but it's clear that there are rules in Europe and if you exonerate yourself from these rules you exclude yourself from Europe."

Berlusconi, facing defections from his own party, insisted he had invited the IMF to offer advice. Berlusconi said on Friday he had rejected an offer of funds from the IMF – "I don't think Italy needs that" – and said his country was more solid than France or the UK.

British officials privately admit that potential economic collapse in Italy is now the single biggest concern gripping world leaders. One said: "We cannot have the Italians meeting in crisis every three days. We need some action."

The UK government will now focus on urging its European partners to make progress, and will continue to support extra cash for the IMF. Cameron said he would not need UK parliamentary approval for this as the Commons has already agreed to an increase that would cover the proposed UK additional contribution.

The EFSF has €440bn ($608bn) available to lend, of which roughly half is expected to be consumed by bailouts of Ireland, Portugal and Greece. Italy has nearly €2tn in debt outstanding.

The European Central Bank has purchased Italian debt since August, but will not carry on doing so indefinitely. The need to bolster the EFSF has led the EU to pursue countries outside the euro zone with surplus cash, such as China. 

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The gloomy outlook takes its toll

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What Are We To Do by LIN SEE-YAN

About one-half of European Financial Stability Fund already committed or utilized

WITH every passing day, the shelf-life of eurozone's rescue package is getting shorter. On July 21, eurozone leaders agreed to a second Greek bailout (see Greek Bailout Mark II: It's a Default in this column on July 30, following the first, Greece is Bankrupt on July 2). European parliaments have yet to complete ratification to expand the 440 billion euros bailout fund (European Financial Stability Fund or EFSF). Already, talk has shifted to expanding the EFSF in the light of escalation of the crisis.

Frankly, the fund is just not large enough to halt the contagion. It's a matter of market confidence really the larger, the better. About one-half of the fund is already committed or utilised with more demands coming on. Greece will miss the deficit targets for this year and next despite austerity, showing the drastic steps taken to avert bankruptcy are not enough. The crisis is boiling over. Eurozone ministers have since delayed the release of 8 billion euros cash scheduled for Oct 13, threatening to revisit the deal where private bondholders may be asked to take a higher “haircut”. This has rattled markets and raised fears of an imminent messy default. Estimates are that with a 60% haircut (21% now) for private bondholders, Greek banks would suffer another 27 billion euros write-down, wiping out their capital. Inevitably, the fall-out will have much wider repercussions.

The contagion

The world economy once again stands on a knife's edge. As finance leaders gathered at end-September, they all want to look forward. But markets and investors are forcing them to peer down the precipice into the abyss as growth in advanced economies slackened sharply and emerging nations grappled with inflation in the face of a fast deteriorating eurozone debt crisis, wondering how to make the needed adjustments to restore confidence. Continuing uncertainty and worries about the global economic outlook fuelled a rush into safe assets. The eurozone is seen to be on the brink of recession. Its prospects have been hit by sharp falls in consumer and business confidence as well as fiscal austerity measures across the continent and pessimism about US growth. Germany's slowdown is worrisome because of its role as Europe's powerhouse.

Gathering pessimism came to a head as global equities tumbled on Sept 22 as the Federal Reserve's (Fed) gloomy outlook (“there were significant downside risks to the economic outlook”) caused investors to sell stocks in a widespread flight to safety. UK's FTSE (All World) Index fell by as much as 23% from its May high, signifying a bear market as it fell through the 20% threshold. US and UK stocks were not yet in bear territory but German and French equities have since been there. The sell-off was mooted by a big move into government bonds. Benchmark German 10-year bond yields hit an all-time low of 1.65%, while US Treasuries fell to 1.77%, the lowest level since 1946. On a day reminiscent of 2008, Asian stocks and currencies tumbled reflecting foreign capital repatriation, with the Indonesian stock market plunging 9%, the Australian dollar falling below US dollar parity, and the Hong Kong Hang Seng index settling at its lowest point since July '09.



Amid market tumult, investors were left wondering what to do in October. The 3rd quarter had been painful and volatile. The Dow finished the quarter down 12.1%; the S&P's 500 fell 14%. Many had hoped for a 2nd half rebound after spring's “soft-patch”, only to be confronted with worries of a possible double-dip recession. There is also a new fear: weakness in emerging market economies, especially China. During the 3rd quarter, markets were tossed to and fro on a daily (even hourly) basis, reflecting developments in Europe and United States. In August and September, the Dow industrials rose or fell by more than 1% on each of 29 days; on another 15 days, the daily moves were more than 2%. The last time the market saw this was in March/April '09. The “fear index” (Vix volatility index) reflecting market instability was up 160% over the 3rd quarter, finishing at 40% (normal 15%-20%) on end September.

The problem is Europe

The damage was worse in Europe. The main German and French stock indices both lost more than 25% of their value in the 3rd quarter, the largest quarterly loss since 2002. Asian stocks also took a pounding, experiencing double-digit losses. The Hong Kong Hang Seng index lost 21%. Even gold usually the refuge suffered a collapse in September from its record high in August. The safety was in US Treasuries, German bunds and UK gilts. Yields didn't matter for now it's just preservation of capital. As I see it, the sovereign risk crisis is compounded by much weaker growth among the “core” nations, and increasing market stress. In the United States, it has just managed to avoid recession, with little buffer to insulate itself from any fallout from an European event. Complications can also come from a busting bubble in the Chinese property market, rattling Chinese banks with ripple effects on world markets.

US and European stocks tumbled when markets opened in the new 4th quarter, with S&P's 500 entering the bear market as Europe postponed a vital tranche drawing to debt-stricken Greece. Wall Street fell about 2% on Oct 3, extending decline to a 13-month low as investors feared the crisis would lead the United States into a new recession. With this drop, the benchmark S&P's 500 had fallen past 20% putting it in bear territory. In Europe, banking stocks dived as investors slashed their exposure on worries authorities are unable to contain the debt crisis. The Stoxx Europe 600 index tumbled 2.8%, hitting its lowest since Oct '08; Stoxx Europe 600 banks finished 4.3% lower. Euro-zone's problem is one of market confidence rather than solvency. In Asia, most regional markets in the 3rd quarter suffered their biggest falls since the Lehman's collapse in '08, with Tokyo losing 11% and Hong Kong 21%. Since then, Korea dropped 3.6%, Hong Kong another 3.4%, India's Sensex 1.8%, the Nikkei, 1.1% and Australia, 0.6%. Italy's latest downgrade a 3-notch cut by Moody's to A2 with continued negative outlook reflected as much euro-zone's inability to spur market confidence, as it does Italy's failure to promote growth. Without a comprehensive response to the crisis, the risk of a downward spiral remains. In the past days, European stocks posted hefty gains as policymakers were reported to be prepared to help recapitalise European banks, estimated at 100-200 billion euros. Priority remains with Spain and Italy which are basically solvent, but lacks credibility. The prospect of the IMF coming-in alongside EFSF to buy Spanish and Italian bonds boosted sentiment.

Default by Greece?

Greece will miss the targets set just two months ago. The 2012 approved budget predicts a deficit of 8.5% of GDP for '11, well short of the 7.6% target. For '12, the deficit is set at 6.8%, short of the target of 6.5% reflecting the sluggish economy. Its 8.5% target remains a challenge in the current environment. GDP is expected to fall by 5.5% in '11 pushing unemployment to 16%, and a further GDP shrinkage of 2%-2% is in prospect. The '11 shortfall meant Greece would need another 2 billion euros just to bridge the gap. Greece is now off-track, reflecting disappointing revenues and missed targets. On Sept 21, it acted to raise taxes, speed-up public lay-offs, and cut some pensions. Ongoing austerity measures are already deeply unpopular.

My mentor and teacher at Harvard (Marty Feldstein) believes the only way out is for Greece to default and write down its debt by at least 50%. This strategy of default and devalue is standard fare for nations in Greece's shoes. But this hasn't happened because “Greece is trapped in the single currency.” So why are the political leaders trying to postpone the inevitable? He offered two sensible reasons: (i) banks and other financial institutions in Germany and France have large exposures to Greek debt, and time is needed to build capital; and (ii) default would induce sovereign defaults in other countries and runs on their banks. The EFSF is just not large enough to bail out Italy and Spain. Europe's politicians hope to buy enough time (2 years) for Spain and Italy to prove they are financially viable. As I see it, both these nations don't have another two years to prove their worth. The markets will decide the fate of Greece (and possibly Spain and Italy), not the other way around.

The shadow of recession

International Monetary Fund's September forecast pointed to growth in emerging economies exceeding 6% in '11 and '12, but with the advanced nations sliding to below 2%. On current trends, the latter prediction is perhaps closer to 1%. I think the outlook for the eurozone is deteriorating fast: at best, they are already in the throes of a severe slowdown; at worst, a relapse into recession. The European Commission recently stated growth is at a virtual standstill, with eurozone GDP rising by 0.2% in 3Q'11 and 0.1% in 4Q'11. Pain will be most intense in the south (no growth in Italy in '11 and '12) where the pressure of austerity is greatest. But the “core” economies are also hurting. IMF estimated German growth would slow down from 2.7% in '11 to 1.3% in '12. The short-term outlook is even worse. According to Markit Economics, eurozone's factory activity fell to a 25-month low of 48.5 (a reading below 50 indicates contraction). Indications are economic conditions will deteriorate. Germany's index fell in September with overall activity just above 50 the worst performance in two years. France's index stood at 48.2; Italy, 48.3 both in contraction territory. Eurozone contractions reflected lacklustre domestic demand and falling export sales. More sluggish growth will make it harder to achieve fiscal targets. Rising risk of recession will damage efforts to deal with the crisis.

The Fed's latest assessment is for the US economy to falter needs to be taken seriously. Citing anaemic employment, depressed confidence and financial risks from Europe, its chief urged Congress not to cut spending too quickly in the short-term even as they grapple with fiscal consolidation over the medium-term. The IMF expects the United States to grow by 1.5% in '11 (less than 1% in 1H'11) and 1.8% in '12. The short-term outlook isn't looking better. Indeed, the business cycle monitoring group ECRI concluded last week that the US economy is tipping into a new recession. Latest data are mixed after a dismal August. US manufacturing managed to keep expanding and employment strengthened in September but the tone has not been sufficiently robust to dispel fears of another downturn. Sure, United States was not in recession in 3Q'11 but the lack of new orders remains of concern. While even sluggish job growth is welcome, the government's belt-tightening is likely to prove a significant drag on the economy. The Fed's commitment to ensure recovery continues will re-assure. But if Europe falters badly, there is little the Fed can do.

Housing ignored

Over the past 35 years, housing had added value to the GDP. Empirically, in the two years following most recessions, housing adds about 0.5%point to US GDP growth. So far, the contribution has been negative. This is so because: (i) home prices dropped 2.5% this year; since its '05 peak, home prices have fallen 31.6%; (ii) United States lost US$7 trillion (close to one-half of GDP) in the value of homes they own: homeowners equity has since fallen to 38.6% of home values; (iii) home-starts are at an all time low and still falling. The housing bust weighs heavily on consumers making them more reluctant to spend. Innovative ways to unleash housing are needed.

Looks like the world remains in a bad shape. It is also a dangerous place with growing uncertainty, high volatility and increasing social unrest. Europe in particular is in a high risk gamble. I worry European politicians may learn the hard way in trying to outsmart the markets.

> Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching & promoting the public interest. Feedback is most welcome; email: starbizweek@thestar.com.my

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Bleed the Foreigner!

Harold James

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PRINCETON – Today, the world is threatened with a repeat of the 2008 financial meltdown – but on an even more cataclysmic scale. This time, the epicenter is in Europe, rather than the United States. And this time, the financial mechanisms involved are not highly complex structured financial products, but one of the oldest financial instruments in the world: government bonds.

While governments and central banks race frantically to find a solution, there is a profound psychological dynamic at work that stands in the way of an orderly debt workout: our aversion to recognizing obligations to strangers.

The impulse simply to cut the Gordian knot of debt by defaulting on it is much stronger when creditors are remote and unknown. In 2007-2008, it was homeowners who could not keep up with payments; now it is governments.

But, in both cases, the lender was distant and anonymous. American mortgages were no longer held at the local bank, but had been repackaged in esoteric financial instruments and sold around the world; likewise, Greek government debt is in large part owed to foreigners.

Because Spain and France defaulted so much in the early modern period, and because Greece, from the moment of its political birth in 1830, was a chronic or serial defaulter, some assume that national temperament somehow imbues countries with a proclivity to default. But that search for long historical continuity is facile, for it misses one of the key determinants of debt sustainability: the identity of the state’s creditor.

This variable makes an enormous difference in terms of whether debt will be regularly and promptly serviced. The frequent and spectacular early modern bankruptcies of the French and Spanish monarchies concerned for the most part debt owed to foreigners.

The sixteenth-century Habsburgs borrowed – at very high interest rates – from Florentine, Genovese, and Augsburg merchants. Ancien régime France developed a similar pattern, borrowing in Amsterdam or Geneva in order to fight wars against Spain in the sixteenth and seventeen centuries, and against Britain in the eighteenth.

The Netherlands and Britain, however followed a different path. They depended much less on foreign creditors than on domestic lenders. The Dutch model was exported to Britain in 1688, along with the political revolution that deposed the Catholic James II and put the Dutch Protestant William of Orange on the English throne.

Indeed, the Glorious Revolution enabled a revolution in finance. In particular, recognition of the rights of parliament – of a representative assembly – ensured that the agents of the creditor classes would have permanent control of the budgetary process.

They could thus guarantee – also on behalf of other creditors – that the state’s finances were solid, and that debts would be repaid. Constitutional monarchy limited the scope for wasteful spending on luxurious court life (as well as on military adventure) – the hallmark of early modern autocratic monarchy.



In short, the financial revolution of the modern world was built on a political order – which anteceded a full transition to universal democracy – in which the creditors formed the political class. That model was transferred to many other countries, and became the bedrock on which modern financial stability was built.

In the post-1945 period, government finance in rich industrial countries was also overwhelmingly national at first, and the assumptions of 1688 still held. Then something happened. With the liberalization of global financial markets that began in the 1970’s, foreign sources of credit became available. In the mid-1980’s, the US became a net debtor, relying increasingly on foreigners to finance its debt.

Europeans, too, followed this path. Part of the promise of the new push to European integration in the 1980’s was that it would make borrowing easier. In the 1990’s, the main attraction of monetary union for Italian and Spanish politicians was that the new currency would bring down interest rates and make foreign money available for cheap financing of government debt.

Until the late 1990’s and the advent of monetary union, most government debt in the European Union was domestically held: in 1998, foreigners held only one-fifth of sovereign debt.

That share climbed rapidly in the aftermath of the euro’s introduction. In 2008, on the eve of the financial crisis, three-quarters of Portuguese debt, half of Spanish and Greek debt, and more than 40% of Italian debt was held by foreigners.

When the foreign share of debt grows, so do the political incentives to impose the costs of that debt on foreigners. In the 1930’s, during and after the Great Depression, a strong feeling that the creditors were illegitimate and unethical bloodsuckers accompanied widespread default. Even US President Franklin Roosevelt jovially slapped his thigh when Reichsbank President Hjalmar Schacht told him that Nazi Germany would default on its external loans, including those owed to American banks, exclaiming, “Serves the Wall Street bankers right!” In Europe today, impatient Greeks have doubtless derived some encouragement from excoriations of bankers’ foolishness by German Chancellor Angela Merkel and French President Nicolas Sarkozy.

The economists’ commonplace that a monetary union demands a fiscal union is only part of a much deeper truth about debt and obligation: debt is rarely sustainable if there is not some sense of communal or collective responsibility. That is the mechanism that reduces the incentives to expropriate the creditor, and makes debt secure and cheap.

At the end of the day, a collective, burden-sharing Europe is the only way out of the current crisis. But that requires substantially greater centralization of political accountability and control than Europeans seem able to achieve today. And that is why many of them could be paying much more for credit tomorrow.

Harold James is Professor of History and International Affairs at Princeton University and Professor of History at the European University Institute, Florence. He is the author of The Creation and Destruction of Value: The Globalization Cycle.

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Euro fallout is bad news for world economy

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Global Trends By Martin Khor

The IMF-World Bank meetings last week confirmed the global economy has entered the ‘danger zone’ of a new downturn and possibly recession. This time it could be more serious and prolonged than the 2008-2009 recession. 

THE last two weeks have seen a clear downward shift in expectations on the global economy. The dominant view now is that the world has slipped into stagnation that may well become a recession.

Warnings that the economy had entered a “danger zone” generated the gloomy mood at the annual Washington gathering of the International Monetary Fund and World Bank, as well as the G20 finance ministers’ meeting.

Prominent economists are predicting the new crisis will be more serious and prolonged than the 2008-09 recession.

If the United States and its sub-prime mortgage mess was the immediate cause of the last recession, the epicentre this time is the European debt crisis.

The eurozone’s GNP grew by only 0.2% in the second quarter, and the European Commission predicts the rates will be 0.2% and 0.1% in the third and fourth quarters.

As the domino effect of contagion hit one European country after another (rather like how Asian countries were affected in 1998-99), European leaders have scrambled for a solution.

But none has worked so far.

In the Greek debt tragedy, the government has had to announce one painful austerity measure after another, but its economic condition continues to worsen and the social protests and strikes indicate the approach of the political breaking point.



The costs of austerity are already being seen (by the public at least) to outweigh the benefits.

Several British newspapers last week reported a set of big measures to tackle the European crisis was reportedly being worked on by unnamed European officials.

The centrepiece is a Greek debt default with creditors repaid only 50%, and two measures to cushion that shock – an injection of fresh capital into European banks that would suffer big losses from the default, and the boosting of the European bailout fund from 400-plus billion euros to almost two trillion euros to enable hundreds of billions of euros in new credit to countries like Italy and Spain to prevent them from becoming new debt-crisis economies.

However, this leaked news of a big Plan B was not confirmed by any policy maker, so its status or even existence is unknown.

Instead, the news out of Washington last week was of continued paralysis in European policy.

Greece this week is facing a new crunch time – waiting to see if the European institutions and IMF will approve the next bailout instalment of US$8 billion to service loans that are coming due, and what would happen if they do not. Would it be time then to declare a default?

Meanwhile, the US has its own budget deficit tug-of-war between the President and Congress and between Republicans and Democrats.

What this means is that Europe and the US are not able to make use of the policies (massive increases in government spending, interest rate cuts and pumping of money into the economy) that pulled them quickly out from the last recession.

Moreover, the coordination of policy actions among developed countries (and several developing countries as well, that also undertook fiscal stimulus policies) that fought the last recession no longer seems to exist, at least for now.

Thus the new global slowdown or recession is likely to last longer than the short 2008-09 recession.

The developing countries should thus prepare to face serious problems that will soon land on them.

We can expect a sharp fall in their exports as demand declines in the major economies.

Commodity prices are expected to climb down; they have already started to do so.

There may be a reversal of capital flows, as foreign funds return to their countries of origin.

The currencies of several developing countries are already declining and it may be the start of sharper falls.

It’s beginning to look like 2008 all over again.

But this time the developing countries are starting this downturn in a weaker state than in 2008, since they have not yet fully recovered from the last shock.

And as the downturn proceeds, there will be fewer cushions to blunt the effects or to enable a rapid recovery.

It is also clear that there is an absence of a global economic governance system, in which the developing countries can also participate in.

All countries are affected when the global economy goes into a tail spin.

Once again, the developing countries are not responsible for the new downturn, but they will have to absorb the ill effects.

Yet there is no forum in which they can put forward their views on how to lessen the effects of the crisis on them and what the developed countries should do.

As the new crisis unfolds, there will be renewed calls for reforms to the international financial and economic system.

This time there should be a more serious reform process, otherwise more crises can only be expected in the future.