Posts Tagged ‘Eurozone’
Why I’m not that worried about Greece
Pundits (and yes, to a degree, I’m one) have taken every position possible over the Greek debt crisis. I’ll toss in my 2 cents, and hopefully I’ll add a bit to the debate.
First, I’ve never been to Greece, but one of my colleagues from Greenfield just came back and brought me a bottle of Ouzo (than you, U.S. Customs Service). Also, I had a nice lunch at a Greek restaurant a few days ago. As economists go, that must count for something.
Here is Greece’s problem in a nutshell — as a stand-alone economy they suck. Their people are old, the bright young folks go somewhere more productive as soon as they are old enough to read a map, other than feta cheese they don’t export much of anything, and there simply isn’t enough austerity to balance the budget. Hence, they’ve hocked everything worth hocking right down to the scrap value of the Parthenon to pay for social services and little things like food and medicine. Additional austerity (demanded from what passes for the right in Europe) will salve the wounds for a while, and additional high living (essentially a non-starter, but none-the-less demanded from the left) simply isn’t in the cards. The credit cards are maxed out and the repo man is backing up into the driveway.
By the way, Greece has roughly the same population as Ohio. Greece’s most important industry is tourism, which accounts for 20% of Greece’s GDP and employs one out of five people who actually have jobs. In 2014, tourism was an estimated $12 Billion slice of the economy. However, to put that in perspective, Ohio’s tourism is estimated at $40 Billion per year. You see? The most important thing in Greece is about a 4th the size of one of the least important things in Ohio.
We don’t really think about it here in America, but if the 50 states tried to exist as separate nations, some would die on the vine and others would prosper very nicely. (Although, to be fare, the worst unemployment in America, West Virginia at 7.2%, sits right in the middle between the two healthiest economies in Europe, France and Germany.) We don’t think about that because of the crucible of the Civil War, which you may have read about in your history books. Not withstanding some of the news from South Carolina lately, the Civil War was about several things. Slavery was at the top of the list, for sure, but southern “heritage” types (and yes, I was born and reared in the South) would posit that it was all about states rights versus the central authority of Washington. Let’s go with that for a minute, just for the sake of argument. Let’s assume that was the central theme of the war. How did that turn out? Huh? Turns out, the north won. America was one nation, undivided, period, exclamation point. Along the way, we’ve made numerous economic decisions which would not be rational if we were 50 separate nations, but make perfectly good sense in the long shadow of the Civil War. Hence, some states don’t pull their own weight, economically, but we drag them along, sometimes kicking and screaming, as the rest of us march forward into the economic future.
Europe also had a recent crucible. Indeed, one might think of the 20th Century as one long, amazingly painful period. It essentially started with the “War to End All Wars”, and then a massively painful depression, followed by, “War, the Sequel”, and then followed by, “Let’s all count down to nuclear Armageddon” as the superpowers stared each other down across Germany’s Fulda Gap. By the time the Eurozone was created, thinking people in Europe were willing to do whatever it took to unite the continent and make sure that the casus belli of the past no longer existed.
So, that takes us to Greece. One might not think of Greece as being a focal point, but that would be short-sighted in the extreme. Of course, anyone who has studied anything about western civilization thinks of Greece as the fountain of democracy. That said, it is right at the crossroad of Europe and Asia, and has been central to pretty much every argument in that part of the world in the past two or three thousand years. More to the point, the reasonably solid economies of Europe look at the laggards with pity but also with fear, because a splintering of the Eurozone removes the warm blanket of unity that staves off the kinds of wars that Europe is all too familiar with.
So, like it or not, Europe will hold their noses and cut a check to help pay for Grandma Greece’s hospice bills. They will probably make her move to from a private room to a semi-private one, and she’ll have to settle for generic medicines from now on, and eat in the cafeteria like all the other folks, but she won’t be allowed to starve, and she’ll get a card every Christmas, as long as anyone remembers the 20th century.
European Real Estate Funding Gap
Property Investor Europe sent me a report today about the shortfall in real estate funding in Europe. The implications are a bit nerve wracking.
First, some background — European commercial real estate investors place significantly more emphasis on “traditional” bank lending than Americans. As such, the sort of private-debt network that exists in the U.S. has not grown in Europe.
According to a report by the research firm Swisslake, central bank liquidity flows gave been directed at small and diversified loans, which are in high demand. However, commercial lending in Europe is actually facing cuts of €500 Billion or so. In addition, banks are increasing equity requirements, leaving real estate with large financing gaps, Swisslake calculates that only about $3.8 Billion headed towards Europe in the last year from non-bank lenders.
However, this is creating a market opportunity for private debt funds. Reportedly, 30 new funds have been launched in 2012, adding to the 20 new funds created in 2011. These funds have increased their market share to 20%, up from 15% at the beginning of 2012. Intriguingly, many former equity fund managers are now shifting to private debt funding.
Share this:
Wither goeth the Euro?
Observations on Greece, the Euro, and the implications for real estate finance —
First, there is extraordinary confusion over the causes of the Euro crisis, and thus confusion over the effects, particularly here in the U.S. A few observations, to set the stage:
1. Europe is in a massive demographic decline. “Native” Europeans have a birth rate which does not support the population, and as such their “native populations are getting older and smaller. Up to a point, this has positive effects on the economy, because small children cost money and a population actually gets more productive as the “bubble” in its age demographic approaches middle age (middle-agers are more productive than young folks or old folks). The REAL problem begins when that bubble starts approaching retirement, and there aren’t any younger cohorts to replace them. This is part and parcel of what happened in Japan not to long ago, and the reason why the Japanese economy seems to be in permanent doldrums.
2. As an aside, I focus entirely on Europe’s “native” population. Unlike the U.S., Europe has a terrible problem integrating immigrants into its productive society. That’s a topic for others to expound on.
3. The Euro was formed in a very different way from the dollar. When the U.S. dollar was adopted as a currency, the Federal government took on all of the state’s “operational” debts (the “Alexander Hamilton Solution”) which resulted from the American Revolution, and the states were prohibited from running operational deficits going forward. States can issue debt to pay for capital items (highways, schools) but not for operational items. Hence, a state can’t borrow money to pay interest on money it already borrowed. The Hamilton Solution means that the U.S. has a highly integrated economy, unlike Europe’s, which is more artificially integrated. (One might argue that the U.S. also benefits from a common language. Anyone who has ever traveled from Seattle to New Orleans may debate this issue.)
4. Soooo…… if the U.S. borrows money to cover its operational deficit, it can “print” money to cover those debts. (OK — a bit of advanced Econ for ya’ll — “print” is an analogy. Technically, the Fed expands or contracts bank credit to increase or decrease the money supply. “Print” is just a handy shorthand for the more complex methods.) On the other hand, Greece can’t “print” Euros — they all come from European central banks.
One might notice that the debt/GDP ratios in Greece and the other troubled countries are no where NEAR where we’d historically see countries in dire straights (Given the dampening influence of the World Bank, IMF, the G-20, and such, we really don’t see hyper-inflation any more in emerging markets like we did a generation ago.) The big problem is that Greece can’t “inflate” itself out of debt by printing Euros. If they could, the banks would gladly loan them money so as to “kick the can” down the road a bit. If Greece had a growing, productive economy, then they could grow their way out of debt, but no-one buys into THAT fairy tale, either.
If, on the other hand, they withdraw from the Euro zone, they’ll be able to print all the Drachmas they want, albeit at terrible inflation rates. If the Greek citizenry thinks that current austerity plans are potentially painful, they should re-read some history of the German Weimar Republic (you know — that period in history when the Germans were so distraught, they elected Adolf Hitler because he promised to “fix things”.)
What does this have to do with real estate? At the core, the Greek problem (and by extension, the entire Euro problem) is a BANKING issue, not a debt/GDP problem. Admittedly, some countries within the Euro zone borrowed money that they had not idea how they would pay back. That’s a structural failure dating from the creation of the Euro, and it’s highly doubtful, particularly at this stage in Europe’s economy, that the Eurozone nations would be willing to accept such a level of fiscal unity and central governance. (Not to mention the European Union countries which are NOT members of the Eurozone — such as the UK).
Currently, in the U.S., we just came out of a banking-induced housing bubble. We’re currently IN a banking-induced housing depression. In the worst-hit states (for example, Florida and Nevada), the lending market, particularly for retirement or second homes, has nearly stopped. The Greek problem is, at its heart, a banking problem, since European sovereign debt relies much more heavily on commercial banks than in the US. Relatedly, banking is global today (Note how many HSBC Bank offices are scattered through the US?) At the back-office level, banking is almost completely global, with liquidity flowing across oceans as rapidly as phone calls and e-mails. (Recall: central bankers don’t “print” money anymore, they just fine-tune liquidity.)
With that in mind, an already damaged US banking system, with credit severely curtailed to one of the most important sectors of the economy, will be increasingly damaged if and as the Greek/Euro crisis continues to escalate. On the other hand, if the Greek citizenry recognizes that austerity under the Euro is preferable to ultra-austerity under the Drachma, then a huge sigh of relief will permeate the world’s banking customers.
Share this:
European Banking
I like Forbes magazine, and while I’ve only met Steve Forbes once, he’s seems to be a terrifically engaging fellow. That having been said, while he and I are probably not very far apart in our core political thinking, I DO disagree with him on many key points (gold standard being the top of the list). However, he wrote an excellent op-ed piece back in December about Angela Merkel and the actions/inactions which permeate European decision-making today. Recent events, particularly in Greece, suggest that Ms. Merkel may have read Mr. Forbes and followed suit. Nonetheless, I think some of Forbes conclusions may be ill-founded. (For a full copy of his article, click here.)
Forbes draws an analogy between the European actions of this past Fall with the draconian anti-inflation actions of the last days of the Weimar Republic during the great depression. Students of history may recall that those actions led to the fall of the German republic and the rise of Hitler. Forbes suggests that Merkel is frightened of the inflationary impacts of European central banks buying up Italian and Spanish bonds (thus pumping lots of Euros into the economy).
Forbes points out that banking is very different in Europe than in the U.S. He does not explicitly note — but seems to assume his readers would know — that Europe doesn’t have a system analogous to our Federal Reserve, but rather the major money-center banks serve that same purpose. (In practice, the European banks are joined at the hip with U.S. banks, and thus have an implicit liquidity guarantee from the U.S. Fed.) Forbes notes that liquidity is already strained in Europe, with U.S. money market funds having already withdrawn about $1 Trillion. In addition, European businesses look more to banks than bonds for raising long-term capital. In the U.S., industrial bank loans to nonfinancial corporations totals about $1.1 Trillion, while in Europe the corresponding number is about $6.4 Trillion. Contrast this with the bond market — in the U.S., corporate bonded debt is $4.8 Trillion, but only $1.2 Trillion in Europe. European banks are also the primary buyers of European government debt, while in the U.S. the banks are only one set of many sets of buyers.
I think where Forbes misses the point in his criticism is his failure to recognize that liquidity for this bond-buying spree would come not from a central source such as a Federal Reserve system but rather from German taxpayers. The Germans have bent over backwards already to bear the financial brunt of this crisis, mainly because they are apoplectic at the idea of the collapse of the Euro.
Forbes is also implicitly paying some homage to the Hamiltonian idea that a centralized, Federal Europe (which does not yet exist) could buy up bonds from member countries and issue a new “Euro Bond” which would take its place. The first U.S. Treasury Secretary came up with this idea for two reasons — first, the individual states were heavily in debt to pay for the Revolution, and second it would create a much stronger central government, which would issue a uniform currency and raise money through Federal taxes.
However, Europe of 2012 isn’t nearly as well organized as the U.S. of 1790 (amazing, but true). Plus, even if Angela and Nick (remember — Sarkozy gets a vote, too!) could wave Harry Potter’s wand and create a unified Federal Europe, the burden would still be borne disproportionately. Northern European countries (and even Northern Italy, which is more like Germany than pundits recognize) are quite healthy with the status quo. The peripheral countries (the “PIIGS” for short) are the principle problem right now. Back in the 1790’s, the debts of the various states were actually fairly well-distributed. (And yes, the irony of using Harry Potter as an example — a British wizard who still uses the Pound rather than the Euro — was on purpose.)
So, Forbes gets it half right. The model we now see in Greece may be the answer — a compromise on the bonds, with fiscal restraints borne by the countries that are in trouble. Will Europe ever see a Federal system with the same sort of fiscal and monetary controls we have here in the U.S.? Probably not for a long time. In the meantime, Angela has to play the cards she’s dealt, not the ones Forbes would like to imagine she has.
Share this:
Niall Ferguson in Newsweek
Absolutely riveting piece in Newsweek this week by Harvard Prof. Niall Ferguson titled “The Feds Critics are Wrong: We Need to Avert Depression.” He notes the significant parallels between the current financial crisis and the Great Depression.
In short — and I encourage you to read his piece and not just this synopsis — we often mistakenly think of the Great Depression as starting with the U.S. stock market crash in 1929. Ferguson points out that there were really two depressions, the one that started in 1929 and the subsequent banking crisis that began in 1931 when European banks began to go bust. This moved back across the pond to the U.S., and eventually led to our “bank holiday” in 1933. This second crisis probably had longer and stronger impacts than the first, and wasn’t really ended until the arms buildup preceding WW-II.
It was this spector that Ben Bernake (who was a Depression-era scholar in academia) had in mind when he catalyzed the bank rescues in 2008, and Ferguson makes it clear that we are no where near out of the woods yet. Ferguson encourages leaders to read Friedman and Schartz’s Monetary History of the United States, which he calls the “single most important book about American financial history ever written. They note that the panic of 1929 turned into a depression because of avoidable errors by the FED. Fortunately, Bernake is well aware of this history and is loathe to repeat those mistakes. However, his views aren’t fully accepted — or politically acceptable — by our European allies, who are unfortunately in the driver’s seat right now.
Tim Geitner is in Europe this week, with an array of meetings in preparation for Thursday’s big soiree in Brussels. (See David Jolly’s great article in this morning’s New York Times — click here for the article.) Some good news — a German bond offering this week met with great success in the market, after problems with a similar bond offering back in November. Markets seem to feel that European leaders (read: Merkel and Sarkozy) understand what they need to do and are willing to impose the necessary discipline. Nonetheless, one cannot understate the importance of Thursday’s meeting.
Share this:
Two quickies from the WSJ
Page C1 today has two important articles that caught our eyes. I’ll write about the first right now, and follow up with the other one later today. First, Kelly Evans contributes “Overlooked Inflation Cue: Follow the Money.” It shouldn’t come as a surprise to anyone that money supply growth in the western economies was rampant during the run-up to the current recession. In the U.S. and the U.K., M-2 growth peaked in late ’07 to early ’08 (you don’t have to be a monetarist to figure that out). The Eurozone kept pumping money at faster rates right up to mid ’09
Where money supply growth went from there, though, was a bit of a mixed bag. In the U.S., the annual growth in M-2 fell from a peak of about 12% right before the recession to a low of about 1.5% in early ’10, and has stayed below 3% since. (This basically supports my contention that the sturm-and-drang over QE-2 was all politics.) The U.K.’s growth rate peaked at about 9%, fell earlier than ours, and hit its bottom (about 2%) in mid ’09. Intriguingly, the U.K. money supply growth rate bounced back immediately, with the virtual money presses running full-speed to get the money supply growth rate back up to about 6% in early ’10, but then falling off to about 4% today.
In the Eurozone, the money supply growth tracked very closely with the U.S., bottoming with ours in mid ’10, but since then, the European bankers have started pumping money back into the system, with their M-2 growth rate headed continuously back upwards (at about 4% today).
There are two important implications for all of this (plus my afore-mentioned observation about QE-2). First, the three big western currencies are on decidedly different tacks. The idea of opposing viewpoints among the big western central bankers is not well explored in today’s decidedly multi-polar world economy. (Back when western banking was a closed system, everyone else in the world could only sit back and watch. Now that the Chinese — and even the Japanese with all their other troubles — are more than sidelines spectators, one can only wonder how disagreements among the western bankers will play out.)
Second, though, the really significant point is that despite all of the different paths of M-2 since 2009, all of the growth rates are decidedly down from the earlier peaks. From a real estate perspective, this has major implications. As investors diversify away from stocks, real estate and bonds have a certain equivalency. In a no- or low-inflation scenario, bonds are viewed as the more secure investment. In a higher-inflation world, real estate is viewed as a bond with a built-in inflation hedge. Hence, lower inflation portends well for bonds but poorly for real estate.
One might argue that healthy bonds means low interest rates for real estate, but this ignores the fact that interest rates are already at historic lows. Hence, what real estate needs today is a nice raison d’être, which a tiny bit of inflation would give it. I’m NOT pro-hyper-inflation, mind you, and inflation flat-lines are overall healthy for the economy. However, if real estate investors are hoping for an inflation kick, it doesn’t look like they’re going to get it.
A last minute edit — Later in the day, I noticed that yesterday’s USA Today had a “snapshot” (a little graphic in the lower left corner of the front page) titled “Which Investment Will Perform the Best”, taken from a survey recently conducted by Edward Jones. Topping the list was Technology (33%), follwed by Gold (31%), Blue-chip stocks (10%), Real Estate (9%) and International stocks (9%). Given that gold and real estate are both thought to be inflation hedges, it appears that the market still worries in that direction.
From a small northwestern observatory... 