<?xml version="1.0" encoding="UTF-8"?>
<rss version="2.0"
	xmlns:content="http://purl.org/rss/1.0/modules/content/"
	xmlns:wfw="http://wellformedweb.org/CommentAPI/"
	xmlns:dc="http://purl.org/dc/elements/1.1/"
	xmlns:atom="http://www.w3.org/2005/Atom"
	xmlns:sy="http://purl.org/rss/1.0/modules/syndication/"
	xmlns:slash="http://purl.org/rss/1.0/modules/slash/"
	>

<channel>
	<title>Stock Market News &#38; Stocks to Watch from StraightStocks &#187; Europe</title>
	<atom:link href="http://www.straightstocks.com/article/investing-in-europe/feed/" rel="self" type="application/rss+xml" />
	<link>http://www.straightstocks.com</link>
	<description>Leading Stock Market News, Opinions and Commentary</description>
	<lastBuildDate>Mon, 22 Mar 2010 14:15:21 +0000</lastBuildDate>
	<generator>http://wordpress.org/?v=2.9.2</generator>
	<language>en</language>
	<sy:updatePeriod>hourly</sy:updatePeriod>
	<sy:updateFrequency>1</sy:updateFrequency>
			<item>
		<title>Hungary&#8217;s Economic Correction Still Fails To Convince</title>
		<link>http://www.straightstocks.com/investing-lessons/hungarys-economic-correction-still-fails-to-convince/</link>
		<comments>http://www.straightstocks.com/investing-lessons/hungarys-economic-correction-still-fails-to-convince/#comments</comments>
		<pubDate>Tue, 29 Dec 2009 11:16:00 +0000</pubDate>
		<dc:creator>Edward Hugh</dc:creator>
				<category><![CDATA[Economics]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[alt]]></category>
		<category><![CDATA[Center]]></category>
		<category><![CDATA[Dubai]]></category>
		<category><![CDATA[Eastern Europe]]></category>
		<category><![CDATA[eastern europe economy watch]]></category>
		<category><![CDATA[economic plight]]></category>
		<category><![CDATA[economic sentiment]]></category>
		<category><![CDATA[evident sign]]></category>
		<category><![CDATA[gale force wind]]></category>
		<category><![CDATA[Greece]]></category>
		<category><![CDATA[HEIGHT]]></category>
		<category><![CDATA[household electronics]]></category>
		<category><![CDATA[href]]></category>
		<category><![CDATA[Hungary]]></category>
		<category><![CDATA[Lehman Brothers]]></category>
		<category><![CDATA[living memory]]></category>
		<category><![CDATA[Neil Shearing;]]></category>
		<category><![CDATA[sentiment index]]></category>
		<category><![CDATA[style]]></category>
		<category><![CDATA[TEXT-ALIGN]]></category>

		<guid isPermaLink="false">tag:blogger.com,1999:blog-1443720106009957151.post-5394190203488523860</guid>
		<description><![CDATA[blockquote"Hungary’s potential economic growth should be 2 percentage points over the corresponding EU figure in order to ensure convergence".br /Prime Minister Gordon Bajnai, speaking in London in October /blockquoteTwo contrasting pieces of news about Hungary's economic plight have caught my eye over the last week. In the first place, and in an evident sign of the times, retail sales reportedly fell at their fastest annual rate in over ten years in October, whilst secondly, and more surprisingly, I learnt that Hungary’s economic-sentiment index rose to its highest level since October last year, when the gale force wind sent by the fall of Lehman Brothers engulfed the country. How can this be, I thought? These two pieces of information would, at least on the surface, seem to be pretty contractictory, with the former suggesting the deepest recession in living memory is getting even worse, while the latter seems to add backing to government claims that the worst is now behind them.br /br /strongGloomy Days Ahead For Consumer Spending/strongbr /br /Hungary’s retail sales dropped 0.6% month on month in October, just slightly more than they did in September (-0.5%). In fact Hungary’s retail sales have risen only twice in monthly terms over the past 12 months, and one of these months was June (+0.2%) when consumer anticipation of an impending 5% VAT hike drove large crowds into furniture and household electronics stores. Not unexpectedly this was followed by the July numbers, which saw the largest monthly drop in a decade (-2.3%).br /br /But a glance at the chart below should also reveal that the decline in retail sales is now long term, and not just a product of the recent crisis. Sales peaked in mid 2006, and have since been falling steadily, and while the year-on-year drop was as large as 7.5% in October - another decade long negative record - in fact they are now down nearly 12% from the August 2006 peak, and there are no strong grounds for believing that this trend will now reverse. And the reasons are obvious, since in addition to shrinking personal income levels, and a tighter credit environment credit, Hungary's ageing and declining population is also increasingly acting as a damper on household consumption.br /br /br /pa href="http://2.bp.blogspot.com/_ngczZkrw340/SzOxjpjqmpI/AAAAAAAAP48/7WcC1TxJdFQ/s1600-h/hungary+retail+two.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 232px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418870002665822866" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SzOxjpjqmpI/AAAAAAAAP48/7WcC1TxJdFQ/s400/hungary+retail+two.png" //abr /In fact the situation with vehicle and auto part sales (which are not included in Eurostat retail sales) is even worse than the above data indicate, since given that Hungary is in the midst of a fiscal crisis, there is no room for a cash for clunkers type programme, and sales volume fell an annual 40.1% in the ten months to October, with the decline in October alone being 50.5% (following a 52.3% annual drop in September).br /br /And there is worse news to come for the car sector, since even though the government hiked both the excise tax on petrol and the rate of VAT to 25% from 20% in July, sending fuel prices up like never before, yet another excise tax increase is now on its way. The excise tax on fuel is set to go up as of 1 January 2010 driving the price of gasoline and diesel up by roughly HUF 11 and HUF 7 a litre, respectively. As VAT is levied also on the excise tax, the VAT burden will also increase even if the rate itself won't change.br /br /strongConfidence Rises/strongbr /br /On the other hand according to the GKI sentiment index, confidence is now back at its highest level since October last year, when the credit crisis engulfed the country. The rise follows widely publicised government forecasts that the economy is now heading out of its worst recession in 18 years. The GKI sentiment index rose to minus 25.4 in December from minus 27.5 in November and a record-low of minus 46.2 in April. Business confidence rose to minus 16.7 from minus 18.9 and consumer confidence increased to minus 50.1 from minus 51.9.br /br /According to Finance Secretary of State Tamas Katona Hungary’s economic decline bottomed in the third quarter of 2009 and the rate of contraction should ease in the final three months of the year. Katona suggested the economy may shrink 5 percent in the fourth quarter after contracting 7.1 percent in July-September. The economy is likely to contract an annual 6.7 percent this year and 0.6 percent next year before a return to growth in 2011, according to government forecasts (the EU Commission forecast a 6.5% decline in 2009, and a 0.5% one in 2010, while the IMF are predicting a 6.7% drop this year followed by a 0.9% drop next year). In the short term therefore, all are agreed that the economy will keep contracting, even if the possibility of a quarter of positive growth (which would technically mean exiting recession as currently defined) is not excluded.br /br /The real issue facing students of Hungarian economic growth is thus not 2009, but the extent of any rebound in 2010 and beyond. It is on this rebound, and the level of inflation associated with it, that the future Hungarian fiscal deficit numbers, and the even more critical debt to GDP numbers, sensitively depend. The EU Commission currently forecasts 3.1% growth in 2011, while the Hungarian Central Bank is forecasting 3.4% growth in 2011 (see chart below).br /a href="http://2.bp.blogspot.com/_ngczZkrw340/Szh7Pz4oTlI/AAAAAAAAP5c/_X2DAc2fQOc/s1600-h/bank+of+Hungary+GDP+forecast.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 264px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420217663096376914" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/Szh7Pz4oTlI/AAAAAAAAP5c/_X2DAc2fQOc/s400/bank+of+Hungary+GDP+forecast.png" //abr /br /The question is, are these expectations for such a strong rebound in 2011 really realistic, and even more to the point, a href="http://www.xpatloop.com/news/hungary_pm_bajnai_dreams_about_4_gdp_growth"is there any evidence for Prime Minister Bajnai's claim that a large number of analysts share his governments view that Hungary’s long term GDP trend growth potential is around 4%/a. Or put another way is there evidence for support for such an optimistic view of Hungary's growth future beyond the limited circle of economists who promoted the reform manifestoes (like Oriens, CEMI etc) on which current government policy is based? Certainly I can say that this analyst doesn't share that view, and reading around I have difficulty identifying others who do. Even the reasonable and ever moderate Portfolio Hungary were moved to raise an eyebrow at this claim, saying they "read Bajnai’s statement with a measure of surprise, as GDP estimates for Hungary have been typically way below 4%". The most pessimistic forecast they had seen was below 2% (this would certainly be my view, possibly 1% trend growth would be realistic at this stage), and they stated they were unaware of any "serious estimates above the 3% mark". br /br /What is so striking (and in my view so unrealistic) about the kind of rosy estimates which are being circulated (as illustrated in the Bank of Hungary forecast chart above), is that not only do the median estimates seem to assume a "V" shaped rebound, even the outer limit, worst case type scenarious are based on the idea of a fairly strong rebound, and almost no consideration is given to the possibility that this may not happen, and that the country may be stuck nearer to an "L" shaped non-rebound, where rates of contraction slow, and slow, but growth proves to be surprisingly elusive and hard to come by.br /br /These issues are not new, and I have blogged about then before (in this post - a href="http://hungaryeconomywatch.blogspot.com/2009/05/hungarys-trend-growth.html"Hungary's Trend Growth And Debt Sustainability/a - about the scenarios offered for debt repayment in a paper by Lajos Deli and Zsuzsa Mosolygó from the National Debt Agency). Despite protests to the contrary, and despite the IMF's argument that "In emerging market countries with debt overhangs, the “Keynesian” effect of fiscal adjustment is likely to be outweighed by “non-Keynesian” effects related to expectations and credibility" it is really all about growth, more growth, and only about growth. blockquoteNon-Keynesian effects have to do with the offsetting response of private saving to policy-related changes in public saving. In particular, if fiscal adjustment credibly signals improved public sector solvency, a fiscal contraction could turn out to be expansionary, as private consumption rises based on the view that future tax hikes will be smaller than previously envisaged.br /IMF - Hungary, Request for Stand-By Arrangement, November 4, 2008/blockquoteThe simple issue is, if domestic demand is (for demographic reasons) not able to rebound as the IMF (and the signitaries of the very influential Oriens Report "Recovery, A Programme For Economic Revival In Hungary") imagine, then how is GDP growth going to be strong enough to reduce the weight of debt to GDP?br /br /As everyone recognises, if domestic demand remains weak, growth will critically depend on exports, but the export potential of the economy will depend on the pace of recovery elswhere in the EU, and on relative prices as expressed through the value of the HUF, but almost no serious consideration is being given to the possibility that either the HUF is overvalued compared to the need to export or that EU growth may also be weaker and harder to come by than most median forecasts are assuming.br /br /And indeed things are worse than they seem at first sight, since Hungary (and Hungarians) are, by and large, not in debt in their own currency, so allowing excess inflation does not sweat down the debt, since it only make export prices less competitive, unless you devalue to compensate, in which case the relative value of the debt is unchanged. But if you refuse to devalue, then, quite simply, you get hoisted on your own petard, which is basically where Hungary is right now.p/ppSo, the real question, as ever, is where the ingredients for growth are going to come from. Remember, Hungary's population is now declining steadily.br /br //ppa href="http://4.bp.blogspot.com/_ngczZkrw340/SziBKzRyWHI/AAAAAAAAP5k/BS4Guw_qWQk/s1600-h/hungary+population.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 219px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420224174103877746" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SziBKzRyWHI/AAAAAAAAP5k/BS4Guw_qWQk/s400/hungary+population.png" //abr /br /and ageingbr /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/ShrJTcEiZCI/AAAAAAAAOCc/5459a4jj7tk/s1600-h/hungary+median+age.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 227px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5339801643991065634" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/ShrJTcEiZCI/AAAAAAAAOCc/5459a4jj7tk/s400/hungary+median+age.png" //abr /br /and the working age population is also irredeemably falling.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SziCUl7f7-I/AAAAAAAAP5s/X4d5YzuNYM8/s1600-h/Hungary+Working+Age+Population.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 206px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420225441831055330" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SziCUl7f7-I/AAAAAAAAP5s/X4d5YzuNYM8/s400/Hungary+Working+Age+Population.png" //abr /br /As I said about the retail sales data above, these have now been falling since mid 2006, so it is hard to believe that we are going to see any significant resurgence (taking retail sales as a proxy for private consumer demand), especially as it seems Hungarian's are not now borrowing to anything like the extent they were two or three years ago (see below), and that (for age related reasons it is unlikely the earlier pattern will return. So I will correct myself: it isn't all only about growth, it is all about how to get the exports which can produce the growth. Anyone not recognising that is living, quite simply, in cloud cuckoo land, and after 40 odd years of Stalinist surrealism one would have thought that Hungarians in general had had enough of all this. But perhaps not. Look at the confidence index, and at how many people are prepared to accept Bajnai's assertion that Hungarian trend growth is 4% per annum.br /br /strongWhere Is The Growth Going To Come From?/strongbr /br /blockquote"Looking at the structure of the Hungarian economy I frankly have difficulty seeing where the growth is going to come from. Without a major devaluation (and even then given international circumstances) Hungary will have problems attracting FDI in even the reduced quanities it has been doing over the last five years. The domestically owned private sector has enormous problems and is tied closely to the level of state spending. The financial sector and business services suffers from international problems and it isn't as if Hungary's largest bank - OTP - doesn't have some fairly serious problems of its own tied up in Ukraine, Bulgaria etc. Agriculture and food processing? Well, perhaps - but that isn't in that great a state either."br /br /"It is worth pointing out that except for a brief period at the end of the 1990s when privatization receipts and above trend economic growth eased the situation Hungary has had a long term problem with its external debt going back to 1978 that it has never really escaped from. Successive Hungarian governments have prioritised the precise payment of the debt and have refused to seek rescheduling or restructuring on the grounds that this would damage business confidence. One can actually read the history of economic policy prior to 2000 as being about securing Hungary's public financing needs given this policy choice, to the detriment of the needs of the real economy. I read the relaxation of budgetary discipline after 2000 (and especially post-2002) as being about the interaction of mounting frustration at low living standards among the population with the dynamic of party competition." p/pp"That having been said, if one looks at the long view it is difficult to believe seriously that Hungary's debt burden will ever be paid off. Given that servicing these debts will depress the level of economic growth, I think it really is time that the EU, IMF and the authorities in Budapest swallowed hard and accepted reality - a realistic debt consolidation/restructure that takes in both the public and private sector debt is a fundamental condition of stablizing the situation. This is what no-one wants to recognise."br /Mark Pittaway, Senior Lecturer in European Studies, UK Open University/p/blockquotebr /Hungary’s third-quarter GDP contracted by 7.1% year on year in the July-September period compared to the 7.5% fall in Q2 .Quarter on quarter the economy contracted by1.8%, the sixth quarter in a row that the economy has shown negative growth. p/ppa href="http://2.bp.blogspot.com/_ngczZkrw340/SzO3yEaAyAI/AAAAAAAAP5E/9g4en9i6NtE/s1600-h/gdp+2.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 233px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418876847461025794" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SzO3yEaAyAI/AAAAAAAAP5E/9g4en9i6NtE/s400/gdp+2.png" //abr /Quarter on quarter Hungary's export-driven economy shrank 1.8 percent following a revised 1.9 percent contraction in the second quarter. This was the sixth quarter in a row that GDP growth was negative. The rate of contraction is down considerably on the 2.6% rate of fall seen in the first quarter, but the velocity of contraction is still alarmingly high.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/SzO4JIAEyAI/AAAAAAAAP5M/SNY42iOoxNo/s1600-h/GDP+one.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 199px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418877243562969090" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SzO4JIAEyAI/AAAAAAAAP5M/SNY42iOoxNo/s400/GDP+one.png" //abr /In fact domestic demand fell by 13.3% year on year in the third quarter (see chart below), so the fall in GDP would have been much larger if it had not been for the impact of net trade.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/Szjkda5iScI/AAAAAAAAP6M/E1gUjyMgikw/s1600-h/hungary+domestic+demand.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 221px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420333345628375490" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/Szjkda5iScI/AAAAAAAAP6M/E1gUjyMgikw/s400/hungary+domestic+demand.png" //abr /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/SzjlATcKnQI/AAAAAAAAP6U/sCiRzkJVMHI/s1600-h/Hungary+Net+Exports.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 226px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420333944921562370" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SzjlATcKnQI/AAAAAAAAP6U/sCiRzkJVMHI/s400/Hungary+Net+Exports.png" //abr /br /As can be seen in the above chart, since the last quarter of 2008 Hungary's net trade impact has been possitive, and imports have fallen dramatically faster than exports. And the effect continues, since the export-import gap rose again in October, to 9 percentage points from 5.9ppts in September, following the high of 13.5 ppts in July,  by far the largest seen in recent years.br /br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SzjlPhAgPlI/AAAAAAAAP6c/ZSlwlr8WWts/s1600-h/Hungary+exports+and+imports.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 229px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420334206261673554" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SzjlPhAgPlI/AAAAAAAAP6c/ZSlwlr8WWts/s400/Hungary+exports+and+imports.png" //abr /br /This impact is not, of course, based on a strong recovery in exports, but rather by the fact that imports fall even more than exports (on an annual basis). Basically, when there is a movement in the net trade balance caused by a drop in imports GDP falls more slowly (following a pattern we have already seen in Spain, Greece etc). In fact, for statistical reasons a fall in imports appears as an INCREASE in GDP because the net trade position improves. But unless this drop in imports is accompanied by a significant improvement in the competitiveness of domestic industry (and hence a trade surplus driven by exports) then all you have is economic stagnation and falling living standards, since, for example, house prices will continue to fall, and everyone will feel worse off. Unemployment will obviously also rise, as those involved in the retail sector selling the imports will lose their jobs. People working in the ports for domestic directed external trade trade ditto.br /br /This is the whole argument for devaluation in these kind of circumstances (Greece, Spain, Latvia, Hungary etc), since the devaluation not only helps export industries, it also helps the domestic sector by making imports more expensive. Thus, if demand was there, then a fall in imports would be compensated by a rise in domestic supply, and your interpretation of the equation would not hold.br /br /The whole problem, however, in the cases of the former current account deficit countries is that the internal demand is now longer there, since it was based on unsustainable borrowing in the first place, borrowing that appeared to be supported by rising property values or state guarantees (in the case of fiscal deficits) as collateral. The property prices are now falling, and the deficits are now being slashed back, and neither are  going to rise back again anytime soon and therefore the kind of borrowing we saw before isn’t coming back again anytime soon. So the bottom line is there is a sharp fall in consumption, whatever the headline GDP number says.br /br /In fact the causal mechanism is that the absence of capital inflows leads to a drop in consumption, which in turn means there are less imports. But my big point is that the accounting mechanism used to generate the GDP number  (making Net Exports a positive input convention) masks to some extent the actual drop in living standards, since Net Exports was previously negative (and hence a drag on GDP), and the drop in domestic consumption and imports simply makes it less negative. /ppOf course, there are two ways to make imports less attractive, one is devaluation and the other is structural reform to make the domestic sector more competitive, and that is the Oriens/Bajnai approach, and there is little objection at all to much of what they propose, except that, as we are seeing in one country after another this procedure doesn't act quickly enough to undo the severe distortions that had been produced earlier, but then I doubt, from what they say, that the Oriens signitaries would accept that these distortions were as severe as I argue they are - just look, for example, at the drop in domestic consumtion - 13% - and this after three years of near economic stagnation. Hope against hope.br /br /br /This having been said, exports, and the current account balance have been improving in recent months, although not by a long way fast enough to push the economy back up towards growth. Hungary posted another huge foreign trade surplus of EUR 471 million in October, according to the latest revised numbers released by the Central Statistics Office. October marks the ninth month in a row when Hungary posted a trade surplus in the  EUR 320-550 million range.br /br //ppa href="http://1.bp.blogspot.com/_ngczZkrw340/SzjmPBGiL7I/AAAAAAAAP6s/BrX7YExpEJU/s1600-h/Hungary+trade+deficit.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 202px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420335297208659890" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SzjmPBGiL7I/AAAAAAAAP6s/BrX7YExpEJU/s400/Hungary+trade+deficit.png" //a Despite this significant improvement in the trade balance the Current Account only just managed to sneak into surplus in the second quarter, largely as a result of the very strong negative balance in the income account, which is a product of the very negative net investment position of the Hungarian economy (ie non Hungarians own a long more of Hungary than Hungarian's own of the rest of the world, and this creates a huge imbalance, and as Mark Pittaway says the bullet will have to be bitten - one way or another - about what to do about this at some point.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/Szjl44wPEkI/AAAAAAAAP6k/CdPp9nW1jQY/s1600-h/current+account+balance.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 237px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420334917010526786" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Szjl44wPEkI/AAAAAAAAP6k/CdPp9nW1jQY/s400/current+account+balance.png" //abr /br /In October, exports dropped 11.8% year on year (on a euro basis), while imports plunged by 20.8% year on year.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/Szjo9AvgatI/AAAAAAAAP60/3P_LkAIZImY/s1600-h/hungary+exports+two.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 222px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420338286409312978" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Szjo9AvgatI/AAAAAAAAP60/3P_LkAIZImY/s400/hungary+exports+two.png" //abr /br /This gradual improvement in Hungarian exports has also lead to a modest recovery in the industrial sector, mainly due to stimulus-programme-induced stronger demand in western Europe. Industrial output fell 15.6 percent in the third quarter, down from a fall of 20.5 percent in the previous three months, while recent data showed output grew month on month for the second time in a row in October.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/Szjpfl09zeI/AAAAAAAAP68/vC18s4y8zWY/s1600-h/hungary+IP.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 240px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420338880479874530" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/Szjpfl09zeI/AAAAAAAAP68/vC18s4y8zWY/s400/hungary+IP.png" //abr /br /Against this background, weak exports, and domestic demand in full retreat it is not surprising that investment has been falling, and dropped 6.8% year on year in the third quarter.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SzjiG8W3g0I/AAAAAAAAP58/dAL3ABQPJPk/s1600-h/Hungary+investment.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 212px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420330760449524546" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SzjiG8W3g0I/AAAAAAAAP58/dAL3ABQPJPk/s400/Hungary+investment.png" //aWhat these continuing declines in investment mean is that the level of investment is now at much lower levels than it once was - below the 2005 level according to the rough and ready index I prepared for the chart below. br /a href="http://3.bp.blogspot.com/_ngczZkrw340/Szjh-tBK84I/AAAAAAAAP50/1oHjZW1MhA8/s1600-h/Hungary+investment+Index.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 213px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420330618893038466" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Szjh-tBK84I/AAAAAAAAP50/1oHjZW1MhA8/s400/Hungary+investment+Index.png" //abr /Construction activity is also well down, and has been for some long time now, following the sharp drop between summer 2006 and summer 2007 on the back of the first austerity programme (see chart).br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/SzjqMcRi2TI/AAAAAAAAP7M/B41NdgkOFyg/s1600-h/hungary+construction+index.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 213px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420339651009501490" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SzjqMcRi2TI/AAAAAAAAP7M/B41NdgkOFyg/s400/hungary+construction+index.png" //abr /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/Szjp1rq-SKI/AAAAAAAAP7E/dN7U4Awyi20/s1600-h/Hungary+construction+P2P.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 211px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420339260005697698" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Szjp1rq-SKI/AAAAAAAAP7E/dN7U4Awyi20/s400/Hungary+construction+P2P.png" //abr /Government consumption is also contracting due to the pressure to reduce the fiscal deficit.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/Szji7S1UxgI/AAAAAAAAP6E/cAsLdbjORDU/s1600-h/Hungary+government+consumption.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 234px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420331659836048898" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/Szji7S1UxgI/AAAAAAAAP6E/cAsLdbjORDU/s400/Hungary+government+consumption.png" //abr /br /All in all, the third quarter GDP data indicate that Hungary's domestic economy is not showing any signs of recovery whatsoever, nor should we expect it to do so. The hike in VAT in July hurt private consumption while capital spending has been continually cut back given the failure of export demand to rebound as strongly as hoped. The need to maintain a restrictive fiscal policy stance will also indirectly weigh on consumer and corporate spending, with the consequence that in my view GDP will decrease by nearly 7% in 2009 and then by around 1.5% in 2010.br /br /strongMonetary Policy Tangle/strongbr /br /Hungary's central bank (NBH) last week cut its base rate by 25 basis points to 6.25%. The move which suprised the market participants  (the consensus had been for a 50-bp reduction in  surveys conducted by both Portfolio.hu and Reuters) now means the benchmark rate has been cut by 3.25% since July.  Not everyone was surprised however, since in an interview on 10 December, Centrak Bank MPC member Péter Bihari had said it would be wise to calm rate cut expectations. "Any overshoot in (rate cut) expectations can backfire later. We (the central bank) need to stay sober, and we also need to communicate this sobriety outside," he said.br /br /br /Although Hungary’s inflation outlook might have justified a 50-bp cut, the recent weakening in the forint  (the HUF hit a 6-week low vs. the EUR last week) and the rise in the 5-yr CDS spread to a 3-month may well have signalled the need for a more cautious move, since following events in Dubai and Greece questions are rising about how long the relatively favourable global investor mood can last. Also, the imminence of elections, and the dangers of fiscal loosening (either before or after the election) urge prudence, especially in the light of what we have just seen in Greece.br /br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SzjrRWVhKBI/AAAAAAAAP7c/_62k9CySbVg/s1600-h/Hungary+interest+rates.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 245px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420340834826528786" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SzjrRWVhKBI/AAAAAAAAP7c/_62k9CySbVg/s400/Hungary+interest+rates.png" //abr /br /br /The smaller than expected move also suggests that easing will be cautious in the first months of next year, and that the bank will be sensitive to any signs of worsening market conditions  (especially ahead of next spring’s elections). Weaknesses in the real economy still argue for lower rates, and without moving towards closing down the interest rate gap forint loans will never become competitive with Euro or CHF ones" /pblockquoteDespite this afternoon’s decision by the National Bank of Hungary (NBH) to cut interest rates by a smaller than expected 25bps to 6.25%, there is a good case for further monetary easing over the coming months. We continue to think that the profile for interest rates priced into the market is too high."br /br /"Both we and the consensus had expected a larger 50bps cut today, although the fact that one member of the Council voted for a smaller 25bp reduction in November did suggest that a slowdown in the pace of easing was possible. The forint gained 0.25% against the euro immediately after the decision."br /br /"Nonetheless, while policymakers may now move in smaller steps than we had previously thought, the case for further monetary easing remains strong. The decision to cut by just 25bps today is likely to have been motivated in part by signs that output in some sectors (notably industry) has started to pick up. But while the prospects for some parts of the economy have undoubtedly improved in recent months, the overall pace of recovery will remain subdued."br /br /"In particular, domestic demand will remain a significant drag on growth. A combination of a fragile banking sector, a high proportion of fx-denominated debt and the continued rise in non-performing loans, means that the overall availability of credit remains constrained."br /br /"And although the bulk of the tightening measures have now been implemented, a public sector wage freeze, and private sector wage restraint needed to offset the recent sharp rise in unit labour costs, means that the pain will linger into 2010 and 2011."br /Neil Shearing, Capital Economics/blockquotepbr /br /strongInflation Overshoots Expectations In November/strongbr /br /br /Hungary’s consumer prices rose 5.2% year on year in November, an acceleration from the previous month (4.7%). Month on month prices were up 0.3% . This was an upside surprise since analysts forecasts had been for a rise of  5.0%.br /br //ppa href="http://2.bp.blogspot.com/_ngczZkrw340/SzjulZpmz8I/AAAAAAAAP7s/VIn7SbkJxtM/s1600-h/hungary+CPI.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 231px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420344477848358850" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SzjulZpmz8I/AAAAAAAAP7s/VIn7SbkJxtM/s400/hungary+CPI.png" //abr /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/Szjub54-5fI/AAAAAAAAP7k/4INCK0pSZyw/s1600-h/bank+of+hungary+inflation+forecast.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 231px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420344314704094706" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/Szjub54-5fI/AAAAAAAAP7k/4INCK0pSZyw/s400/bank+of+hungary+inflation+forecast.png" //abr /br /The main reason for the increase was an increase in the prices of unprocessed food (especially fruits and vegetables), energy and fuel. Disinflation is slowing in tradable goods, driven mainly by the durable goods sector (especially new and used vehicles and televisions), while market services disinflation came to a halt (most service prices increased except for tourism and books). /ppThe impression is that the underlying disinflation process has started to slow and there are risks to the medium term inflation outlook. The seasonally adjusted core inflation has been stagnant at around 5%  since July, while the CPI adjusted for tax changes started to accelerate in November (it moderated from 3.7% YoY in June to 0.9% in October and picked up to 1.4% in November).br /br /Which means the NBH’s inflation forecast of 1.9% for 2011 may come under pressure. Inflation may well accelerate to 5.6% in December and  peak at around 5.8% in January and can then fall to below 3% by the end of 2010.  As Neil Shearing says "Despite the uptick in inflation to 5.2% in November (from 4.7% in October), we support the Central Bank’s view that it will "significantly undershoot" the 3±1% target when July’s VAT hike drops out of the annual comparison." Still maintaining this sort of price range with the present Forint value is simply going to prolong and prolong the economic downturn.br /br /br /strongEmployment Falling As Unemployment Rises/strongbr //ppUnsurprisingly, against this background unemployment is rising and rising, hitting 9.9% of the labour force in October, according to Eurostat seasonally adjusted data.br //ppa href="http://3.bp.blogspot.com/_ngczZkrw340/Szjx8r3aUAI/AAAAAAAAP8k/TRSejc6yvUQ/s1600-h/hungary+unemployment.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 201px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420348176409972738" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Szjx8r3aUAI/AAAAAAAAP8k/TRSejc6yvUQ/s400/hungary+unemployment.png" //a Total employment has been on a downward trend since the middle of 2006.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SzjxwQrYVFI/AAAAAAAAP8c/eQVxWaNM_Ew/s1600-h/hungary+total+employed.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 216px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420347962953323602" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SzjxwQrYVFI/AAAAAAAAP8c/eQVxWaNM_Ew/s400/hungary+total+employed.png" //a/ppBut one of the impacts of the economic crisis has been that employment in the public sector, after falling under the austerity programme has risen sharply since the spring (due to a  number of employment schemes designed to keep unemployment down, especially in the regions), and is now back up above its earlier level.br /br //ppa href="http://1.bp.blogspot.com/_ngczZkrw340/Szjxl2ZfzPI/AAAAAAAAP8U/QoG-xS1LUjA/s1600-h/Hungary+public+sector+employment.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 230px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420347784100302066" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Szjxl2ZfzPI/AAAAAAAAP8U/QoG-xS1LUjA/s400/Hungary+public+sector+employment.png" //a Real ex-bonus wages (the central banks targeted measure of wage inflation) has been in negative territory (by around 1%) since the summer.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/Szjxa3CgRII/AAAAAAAAP8M/X_Qmyo1bgTo/s1600-h/hungary+real+wages.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 208px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420347595293738114" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/Szjxa3CgRII/AAAAAAAAP8M/X_Qmyo1bgTo/s400/hungary+real+wages.png" //abr /br /strongBank Credit Turning Negative/strongbr //ppAs is well known a very high proportion of mortgages in Hungary are non-forint denominated (over 85%, mainly in Swiss Francs), but the HUF value of these mortgages has been falling for over a year now./ppbr //ppa href="http://1.bp.blogspot.com/_ngczZkrw340/Szjw-kzsQkI/AAAAAAAAP8E/iIg8ZjodFPQ/s1600-h/forex+mortgages.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 239px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420347109363434050" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Szjw-kzsQkI/AAAAAAAAP8E/iIg8ZjodFPQ/s400/forex+mortgages.png" //a As has the total value of outsanding mortgages in any currency.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/SzjwjKePsrI/AAAAAAAAP78/LgNIMZe3FpE/s1600-h/Hungary+-+total+mortgage+lending.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 237px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420346638437692082" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SzjwjKePsrI/AAAAAAAAP78/LgNIMZe3FpE/s400/Hungary+-+total+mortgage+lending.png" //a Although the stock of mortgages had not been high by some West European standards (around 50% of GDP), they had been growing at a rate of around 20% per annum over the last several years (see chart) but the crisis brought this to an end, and the year on year increase was down to only 2% by October, and will more than likely be negative by the end of the year. Which means, credit expansion and new house construction will NOT be driving any coming Hungarian recovery.br /br /In the current climate, with unemployment rising, and wages falling, and an economy contracting at nearly 7% a year, it isn't hard to understand why not that much new bank lending is going on. Those who are creditworthy are trying hard to save, while those who need to borrow normally aren't that creditworthy, so pleading to the banks to lend more is rather like asking them to subsidise new bad debts, and that is really not something you can do. What kicked the whole current process off in Hungary was a short sharp credit crunch, but now it is the contraction in the real economy which is following its own dynamic, till someone finds a way to put a stop to it. It is the drop in output that is preventing banks from lending, and not banks being unwilling to lend that is causing the contraction to continue.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/SzjwV4ro7OI/AAAAAAAAP70/oFO9Ve7MFYs/s1600-h/Hungary+-+total+mortgage+lending+y-o-y.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 238px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420346410323733730" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SzjwV4ro7OI/AAAAAAAAP70/oFO9Ve7MFYs/s400/Hungary+-+total+mortgage+lending+y-o-y.png" //abr /br /br /strongElection Chaos Looming/strongbr /br /Having seen the shennanikins which have recently taken place in Greece, it was obvious that the run in to the coming election was always going to be complicated, with accusation and counter-accusation being thrown from one party to another. The big problem is that neither party has exactly clean hands in this context, but one thing seems sure, that the 2010 budget is liable to slippage, whether because of the current ruling party moving invoices from 2009 to 2010 (on the assumption that they are going to lose the election, so what the hell), or because the incoming party is going to make promises which will lead to an overspend which they will then blame on their predecessors./ppA group of economists close to opposition party Fidesz now claim next year’s budget "is full of tricks", including unrealistic macroeconomic assumptions that will lead to a deficit far larger than the cabinet’s projection. The current Finance Ministry Péter Oszkó played down the criticism as politicking ahead of the coming elections, and this may well be, but some of the points they make to not, for all that, lack validity. br /br /The 29 economists, who promoted a 'no’ vote on the 2010 budget bill in November, include Zsigmond Járai (Finance Minister of the Fidesz government and former Governor of the central bank), Ákos Péter Bod (Ministry of the Industry in the MDF cabinet and former Governor of the NBH), György Szapáry (former Deputy Governor of the NBH, currently responsible for international relations in Fidesz), Tamás Mellár (head of the statistics office (KSH) during the Fidesz government) and Károly Szász (head of financial markets watchdog (PSZÁF) in the Fidesz era).br /br /Zsigmond Járai argues that, on the one hand the 2010 budget is based on unrealistic macroeconomic assumptions - e.g. only a  0.6% economic contraction while GDP may well shrink by considerably more, possibly by as much as 1.5%, while on the other planned austerity measures, like reduced subsidies, will also worsen the balance.  Among his list of "overestimation tricks" the former central bank head mentioned VAT and corporate tax revenues. The economists claim that the underestimation of the GDP contraction will result in something like HUF 200 bn less budget revenues, adding that another HUF 200 bn shortfall  due to smaller-than-expected revenues from taxes and contributions.br /br /The current official estimate for the general government deficit in 2010 is 3.8% of GDP, a target which is considered to be realistic by both the IMF and the European Commission. The Fidesz economists  claim the gap - without supplementary bufget changes - could be as high as 7-8% of GDP.  György Matolcsy, a leading Fidesz economic spokesman stressed that such a large deficit would be unacceptable for Fidesz as well, and made clear that they are not saying such a massive budget overrun should be tolerated.br /br /Matolcsy said the 2010 budget included no reforms or system overhauls to jumpstart growth in the second half of 2010 as the cabinet expects, and that in his opinion a sustainable growth path is unlikely to be reached before 2013.br /br /The document has not been slow to attract criticism, and apart from Finance Minister Ozskó, Lajos Bokros, Hungary’s former Finance Minister and PM candidate from the minor opposition party MDF, lashed out at the group saying their argument was "ridiculous".br /br /In an interview with public television MTV, Bokros said that "the only alternative to sovereign default was to cut budget spending, take away welfare contributions, e.g. the 13th-month pension and 13th-month wage in the public sector that spun the economy into catastrophe and that led to (government) debt to surge sky high."  "How do you create growth from these (measures)? Only via reforms," he stressed.br /br /A large part of the issue seems to revolve around what to do with the bulging debts of quasi governmental institutions like hospitals, the state-owned railway company MÁV and the Budapest Transport Company (BKV) . Fidesz seems to assume that these debts will need to be swallowed. Bokros does not agree: "If a budget were about consolidating the debts of every (state-owned) companies automatically and without restraint the next year, it would be but a rejection of any reform," he said.  "Reforming" according to Bokros means not covering the debt of "inefficiently operating public institutions", because these liabilities had probably been accumulated due to their profligacy."So, what do you have to do then? [You need to implement] reforms and a create a competitive situation that will have inferior companies go bust and good-quality institutions double in size." /ppWhile sympathising with Bokros in the spirit, it is not clear to me that things are going to be so easy as he imagines in the letter. One thing is however clear, he is right that if solutions are not found for these issues, especially in the problematic pensions and health sectors, Hungary will go bankrupt.br /br /One thing is clear though, life is not going to be easy in post election Hungary. If Fidesz is voted back to power  it will create a new budget, a new tax regime and a new labour policy for as early as July, according to  György Matolcsy, and the new government should also sign a new Stand-By Arrangement with the IMF. Matolcsy reiterated that Fidesz has three scenarios for the tax system: one proposing a radical reduction of personal income tax with a flat family rate; another which would decrease rates on the entire spectrum of taxes; and a third which would cut social-security and health-insurance contributions for employers and employees alike. The only thing which doesn't seem clear is how he expects to pay for all these, especially since he doesn't anticipate a serious return to growth before 2013.br /br /br /Matolcsy also claims that the  budget deficit will be 3-4 percentage points higher than the targeted 3.8% of GDP, citing central bank staff projections in their Inflation Report that the gap is likely to be 4.3% of GDP. Fidesz expects the gap to come in at 4.5% and foresees that state-owned enterprises such as the railway company would need debt consolidation amounting to 3% of GDP. Matolcsy also pointed out that there may be other downside risks to next year’s budget beyond the 7.5% deficit he claims it already incorporates, including a larger-than-expected contraction in consumption, unemployment and a fall in  lending to households that could lead to smaller tax revenues.  All of these points are not without some validity. Further the ongoing  drop in investment will continue to eat into tax revenues and lower-than-forecast inflation could decrease budget income next year, he added.br /br /strongFidesz The Likely Winners, But By How Much?br //strongbr /The gap between Hungary’s two main political parties has narrowed slightly of late, according to the latest opinion survey by Medián.  While an increasing number of voters reported a lack of strong party affiliation, Fidesz has witnessed some decrease in its supporter base. Support for Fidesz within eligible voters has been gradually melting away in recent months, and is now down to 40% in December from 43% in November and 47% in July. The Hungarian Socialist Party meanwhile saw a only a minor and not statistically significant increase in support. But this change in percentage support is more due to an increase in undecided voters than anything else, since 66 per cent of respondents — all decided voters — would vote for Fidesz in the next legislative election, up one point since October. br /br /The ruling Hungarian Socialist Party (MSZP) remains a distant second with only 19 per cent, followed by the Movement for a Better Hungary (Jobbik) with 10 per cent. Support is much lower for the Hungarian Democratic Forum (MDF), Politics Can Be Different (LMP), and the Alliance of Free Democrats (SZDSZ). br /br /br /blockquoteWe should not forget that although Bajnai is portraying himself as being the head of a technocratic government, he is in reality the head of a government which is supported by MSZP. It is clear that the 2010 elections are lost. The game is already for 2014 elections. The government now have apparently stabilised the forint, slowed down the shrinking of the economy, and restored some kind of order and feeling of leadership. The price is high, but it seems that the population by and large accepted the situation as it is. The slight increase of popularity of MSZP and Bajnai himself may support this statement. Now, compromises have been made for a short time with major public service sector agents to accept the restrictions. But, somewhere around next August everyone will be up in arms for new financial support. The latest move of the government, to finally accept the long term and symbolic demand of FIDESZ to cut the VAT on the gas-price to 5% is already, I think, a mine for FIDESZ laid down to explode next year. All the messages of the members of the government are now portraying the government as a similar "responsible" stabilisation force as the 1995 Bokros package was, which would propel again Hungary into a "sustained" high growth as was experienced between 1997-2005 (of course now we all see better the price of this decade of growth). So what we are seeing here is a creation of a "new development" discourse, which it is expected will be destroyed by the "incompetence" etc of the  Orban government.  - Andras Toth, Sociologist/blockquotepbr /br /strongHuge Structural Reforms Gamble/strongbr /br /Well, I think I have said more than enough already in this post, so I think I will leave your with the thoughts Gábor Egry (a Hungarian political scientist) expressed in an e-mail interview with me. Basically it seems to me that Gábor is right, the 4% growth target has no scientific basis behind it at all, and is just a hope that has been repeated so many time people now think it has become a reality. What is going on in Hungary now is a huge gamble, a leap into the dark almost, based on the idea that a shift in the tax structure, and a fiscal discipline to reassure would be investors can bring a growth surge, a growth surge which I argue is structurally impossible without doing something about the level fo the forint, the problem of the forex debt, and without getting domestic monetary policy firmly back in the hands of the NBH./pblockquotepGábor Egry - Research Fellow, Poltikatörténeti Intézet (Institute for Politicalbr /History)br /br /br /Maybe it is worth taking a look at the history of this  idea of 4% trend growth. As far as I can recall it - apart from the constant remarks of  politicians that Hungary needs a growth 2 points higher than the EU core states and this was somehow always expected to be 4% - both before and after the last  elections a group of economists started putting forward ideas for the renewal of  sustainable growth in Hungary and they elaborated a series of - let's put it this way - Slovak-type measures would very soon result in 4% trend growth. As the then government chose another type of policy mix for their budget consodilation,  these critics never failed to emphasize that with  this Slovak-type set of measures not only would the slow growth period after the  budget (austerity, 2006) restrictions have been avoidable, but that these Slovak measures were the only possible way  to elevate the trend growth to 4%. Usually it was the same guys coming with the same  proposals, just branded differently. (CEMI, Oriens etc). Then, when in 2008 the  Reform Aliiance was formed, they recycled these ideas. And even though the  Bajnai government is an MSZP supported one at least initially it  was the result of Gyurcsány's attempt to compell the party to accept  the Reform Alliance program.  From this persepctive Bajnai's statement is quite logical:  they are implementing measures that were proposed by experts with the promise  that they would lead to a 4% trend growth.  Anyway, the idea that such measures will restore a higher and  sutainable trend growth is deeply anchored in the Hungarian economist's  thinking, and most of them - among others Bajnai, who was the loyal but critical  supporter of these ideas in the Gyurcsány government - will adhere to it as it  was the main component of their criticism of earlier policy and as such it is a core component of their common identity. /pp Beyond the historical anecdotes I see some serious faults and gaps in the reasoning behind the approach,  especially as their reasoning is really causal, but rather based on the use of analogies. The main thrust of the approach is not simply to make production in Hungary wage-competitive by cutting the so called  tax wedge, but also through making labor cheaper for local companies and attracting FDI,  thus raising the employment rate. So, they work with both a direct causal relationship between tax rates and the employment rate and with an indirect one, but they then connect this second one causally to the tax rates again. I would argue, that such  soft factors, as labour mobility have had at least as as important impact in the Hungarian case. According to Oriens, the FDI sector in Hungary is  said to be overcapitalized, but I'm not sure whether this is because of the  relatvely high labor costs or is a result of the immobility of the  workforce. It is really important to observe how unemployment is geographically  distributed in Hungary, and how this geographical distribution has not changed in the last two  decades, despite efforts to change this situation with methods in principle similiar to the  present ones, i.e. giving incentives indirectly through  economic policy to market forces. /ppThere really are areas where even near-starvation was not capable of moving people out of their villages and making them go look for employment elsewhere. I know that there are counter-examples in the sense  that in huge areas a lot of people remained deliberately unemployed as they have  found easier ways of making money in the grey or black economy, for example, near  the Ukrainain border. Such people, instead of being moved by the modern dynamic of the market economy, resorted to - let's put it vaguely - pre-capitalist  methods of work organization and resource redistribution. I don't really see how  any kind of tax cuts will move them out from these places and as they have no  significant taxable or taxed income it won't generate surplus demand for  local companies either. Otherwise, I wouldn't neglect the fact that the fall of  unemployment and the rise of employment in many Eastern countries coincided not  only with lower taxes, but with EU accession, making it much easier for  people to seek work in the West. And in fact millions did it. (For example at  least 10% of the Slovak workforce worked abroad before the crisis.) But this is  mobility is more or less lacking in Hungary, and Hungarians by and large never left for the West seeking work.br //ppOn the question of the deficit, it wouldn't surprise me if there was  some accountancy massaging going on behind the scenes. The government may well have put a part of this  years deficit on last year's one, raising that from 3,2 or 3,4% to 3,8 and they  try to convince the state railways not to reclaim their VAT this year etc. Oszkó  conveys self-assurance but he is paid for that. I wouldn't be surprised to find  out at the end that this year deficit will be higher than forcast, but I don't  see too much room for the IMF to protest, either. br /br /They let Latvia raise its deficit a number of times, Romania is not only doing the same but may even finance the deficit (or in a more  populist tone, this year's pensions) from IMF money and - at least as far as I can see - even accept political arguments regarding government incapability to implement unpoular measures before specific elections as arguments to support non compliance. Maybe Hungary will overshoot the deficit, but at least on the surface - in terms of measures implemeted - it is adhering to the terms. The government can simply tell them, ok, guys we did what you proposed, a slightly higher deficit was the result, accept it. Moreover, with the animal spirits currently prevailing  around the world I really don't think the news of a 4,1% deficit will do any harm as  long as markets are in love with recovery, while even a surplus can not prevent  a collapse if their mood changes fundamentally...  /p/blockquotep/pdiv class="blogger-post-footer"img width='1' height='1' src='https://blogger.googleusercontent.com/tracker/1443720106009957151-5394190203488523860?l=easterneuropeeconomy.blogspot.com' alt='' //div]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/hungarys-economic-correction-still-fails-to-convince/feed/</wfw:commentRss>
		<slash:comments>1</slash:comments>
		</item>
		<item>
		<title>Why Spheres of Influence Don&#8217;t Work</title>
		<link>http://www.straightstocks.com/investing-lessons/why-spheres-of-influence-dont-work/</link>
		<comments>http://www.straightstocks.com/investing-lessons/why-spheres-of-influence-dont-work/#comments</comments>
		<pubDate>Sat, 26 Dec 2009 19:01:45 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.22653</guid>
		<description><![CDATA[Ronald Asmus has a good editorial on the evolving security dynamic between Russia and the European Union and United States published in the Washington Post:Europe's bloody history illustrated that spheres of influence do not produce real security, that compelling nations...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/why-spheres-of-influence-dont-work/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Latvia Is Back In The News, And Expect More To Come</title>
		<link>http://www.straightstocks.com/investing-lessons/latvia-is-back-in-the-news-and-expect-more-to-come/</link>
		<comments>http://www.straightstocks.com/investing-lessons/latvia-is-back-in-the-news-and-expect-more-to-come/#comments</comments>
		<pubDate>Thu, 24 Dec 2009 10:24:00 +0000</pubDate>
		<dc:creator>Edward Hugh</dc:creator>
				<category><![CDATA[Economics]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[baltic state]]></category>
		<category><![CDATA[Brussels]]></category>
		<category><![CDATA[Credit Bubble]]></category>
		<category><![CDATA[drop]]></category>
		<category><![CDATA[Eastern Europe]]></category>
		<category><![CDATA[eastern europe economy watch]]></category>
		<category><![CDATA[Euro]]></category>
		<category><![CDATA[government]]></category>
		<category><![CDATA[Greece]]></category>
		<category><![CDATA[href]]></category>
		<category><![CDATA[labour]]></category>
		<category><![CDATA[Latvia]]></category>
		<category><![CDATA[latvian authorities]]></category>
		<category><![CDATA[Latvian government]]></category>
		<category><![CDATA[latvian market]]></category>
		<category><![CDATA[Maastricht]]></category>
		<category><![CDATA[Mark Griffiths;]]></category>
		<category><![CDATA[North Pole]]></category>
		<category><![CDATA[pension]]></category>
		<category><![CDATA[private lending]]></category>
		<category><![CDATA[Riga]]></category>
		<category><![CDATA[swedish banks]]></category>
		<category><![CDATA[unpleasant consequences]]></category>
		<category><![CDATA[Valdis Dombrovskis;]]></category>
		<category><![CDATA[Washington]]></category>

		<guid isPermaLink="false">tag:blogger.com,1999:blog-1443720106009957151.post-2824083105387014130</guid>
		<description><![CDATA[The Latvian government is getting nervous about the level of lending coming from Swedish banks. a href="http://www.ft.com/cms/s/0/bceac44a-ef3d-11de-86c4-00144feab49a.html"According to the Financial Times/a, "Latvia’s prime minister has warned Swedish banks they risk choking off recovery in the Baltic state’s crisis-hit economy unless they resume lending". The Latvian authorities are complaining, it seems, that banks such as Swedbank and SEB, which dominate the Latvian market, have reined in credit as they struggle to contain rising bad loans amid the deepest recession in the European Union.br /br /blockquote“The . . . abrupt stopping of credit is a very problematic issue,” said Valdis Dombrovskis, the prime minister. “We expect Swedish banks to start [lending] again. “Of course you can say that Latvians were borrowing irresponsibly but to borrow irresponsibly you need someone to lend irresponsibly,” he said. “We had very easy credit in a very overheated economy. Now we have almost no credit in a very deep recession.”/blockquoteWell, here is some of the background. After an extended period when private credit was rising at nearly 60% a year, the Latvian credit bubble suddenly burst, with very unpleasant consequences for everyone. Since mid 2007 the annual rate of new credit has been falling rapidly, and turned negative in June this year. In fact total credit has been falling since October 2008.br /br /br /br /pa href="http://2.bp.blogspot.com/_ngczZkrw340/SzJQajiTaoI/AAAAAAAAP2k/K85iyRO0UnU/s1600-h/Latvia+total+Private+Lending+%25+change+y-o-y.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 262px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418481718826068610" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SzJQajiTaoI/AAAAAAAAP2k/K85iyRO0UnU/s400/Latvia+total+Private+Lending+%25+change+y-o-y.png" //a Lending to households alone has also fallen back, after shooting up dramatically over several years.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SzJQTuqU5VI/AAAAAAAAP2c/8DkyBOpssh4/s1600-h/latvia+total+lending+to+households.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 261px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418481601553425746" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SzJQTuqU5VI/AAAAAAAAP2c/8DkyBOpssh4/s400/latvia+total+lending+to+households.png" //a And Latvian base money (M1) has also been falling.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SzJQfnctQWI/AAAAAAAAP2s/l_Z-hqbIXGM/s1600-h/Latvia+M1.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 262px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418481805775683938" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SzJQfnctQWI/AAAAAAAAP2s/l_Z-hqbIXGM/s400/Latvia+M1.png" //abr /In fact, and unsurprisingly (given that it is what we are seeing everywhere in the exploded bubble economies) the only sector which isn't deleveraging at this point is the government one.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/SzJWS8q-H-I/AAAAAAAAP20/cOZB4dNEzEc/s1600-h/latvia+debt+to+GDP.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 259px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418488185204121570" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SzJWS8q-H-I/AAAAAAAAP20/cOZB4dNEzEc/s400/latvia+debt+to+GDP.png" //abr /br /So it seems hard to me to simply blame mean banks for not doing enough about a situation which many saw coming, but few were willing to do anything to avoid. Sure, the banks made a lot of bad decisions, but so did many other people, and each and every party is trying to extricate themselves from the mess as best they cab. In fact total Latvia debt is not in fact falling at this point in time, since while many individual Latvians have been frantically deleveraging, the government has been borrowing at a faster rate than ever, in part to bail out Parex bank, and in part to fund the ongoing fiscal deficit. In the meantime Latvian GDP has dropped sharply, falling back again in the third quarter at an even faster rate than in the second one. Which means that despite the fact that private indebtedness is falling, the level of private debt to GDP is still probably rising.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SzJZTYZr76I/AAAAAAAAP28/N4Nmk7s52-Y/s1600-h/Latvia+Quarterly+GDP.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 252px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418491491182702498" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SzJZTYZr76I/AAAAAAAAP28/N4Nmk7s52-Y/s400/Latvia+Quarterly+GDP.png" //a This unfortunate situation is only further reinforced by the fact that prices are falling - not too fast as yet, only an annual 1.4% in November, but they are falling, and they will fall further, and this means that the percentage of debt to GDP will again rise, and this is especially bad news for the Latvian government (even though the drop in prices is a desired objective, no win-win strategy left to use now) since any fall beyond that anticipated is likely to push up the total debt level of 60.4% of GDP currently being forecast by the EU Commission for 2011.br /br /And the pain doesn't stop, since having cut 500 million lati ($1 billion) in spending in its 2009 supplementary budget, the government initially resisted the idea of finding an additional 500 million lati of savings in the 2010 budget arguing that with no policy change the deficit was expected to be lower than the 8.5 percent target. Valdis Dombrovskis said in October his government could cut only 325 million lati in the 2010 budget and still meet the 8.5 percent target agreed with international lenders. The lenders did not agree, and Swedish Premier Fredrik Reinfeldt even intervened to tell Latvia it “must correct” its deficit. Following the rebuke further measures were passed equal to 500 million lati for 2010, and the country now targets a deficit of 7.6 percent of GDP. This is to be followed by a budget deficit target of 6 percent of gross domestic product in 2011, in order to finally arrive at the magic number of 3 percent deficit in 2012.br /br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SzJZpU1-JFI/AAAAAAAAP3E/mNdB_jzNCB8/s1600-h/latvia+CPI.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 226px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418491868184716370" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SzJZpU1-JFI/AAAAAAAAP3E/mNdB_jzNCB8/s400/latvia+CPI.png" //a/pbr /pBut considerable doubt exists over the ability of the Latvian authorities to fulfil these objectives. Which is why Mark Griffiths, IMF mission head in Latvia, describes the situation facing the government as challenging, and why the EU Commission base their Autumn forecasts on much higher deficit levels. The problem is that with domestic prive deflation (which is, remember, what Latvia is aiming for, the so called "internal devaluation" what is called nominal GDP (that is current price, unadjusted GDP) is likely to fall faster that the so called "real" GDP (adjusted for inflation) and this has two very undersireable consequences. In the first place debt to GDP goes up even faster, and the revenue which government receives (which is based on actual prices) drops faster than GDP, causing more instability in public finances. The deflator has shown falling prices since early this year and the EU commission is forecasting a drop of 5% for 2010.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SzJnyh2oWGI/AAAAAAAAP3M/I9yN6njqoMs/s1600-h/Latvia+GDP+deflator.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 198px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418507419458754658" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SzJnyh2oWGI/AAAAAAAAP3M/I9yN6njqoMs/s400/Latvia+GDP+deflator.png" //abr /br /So basically, in this climate, with unemployment rising, and wages falling, and an economy contracting at nearly 20% a year, it isn't hard to understand why not that much new bank lending is going on. Those who are creditworthy are trying hard to save, while those who need to borrow normally aren't that creditworthy, so Dombrovskis' plea is rather like asking the bank to subsidise new bad debts, and that is really not something you can do, and especially not when you are going along the course you are following because you wanted to, and against one hell of a lot of external advice. What kicked the whole process off was a short sharp credit crunch, but now it is the contraction in the real economy which is following its own dynamic, till someone finds a way to put a stop to it. It is the drop in output that is preventing banks from lending, and not banks being unwilling to lend that is causing the contraction to continue.br /br /But there is another point in the FT article which should give food for thought. /pbr /blockquoteMr Dombrovskis...ruled out devaluation of the lat. While breaking the currency’s fixed exchange rate with the euro would help Latvia’s exporters, it would increase the burden of euro-denominated loans, which account for 85 per cent of lending, he said.br /br /“We would not see much benefit from devaluation because we are a very small and open economy which means that any competitiveness gains we may get would be very short-lived,” he said. “We would redistribute wealth from pretty much all the population to a few exporters.”/blockquotebr /pbr /Well, we haven't advanced too far in all these months, now have we, if we are still wheeling out the argument that "external" devaluation will hit holders of euro denominated loans, since it should be generally recognised that the (very painful) internal devaluation which is now taking place is hitting Euro loan and Lati loan holders alike. And the argument is a strange one to use just shortly after the statistics office announced that due to the rapid reduction in the number of those employed strongand/strong to the fact that many of them changed their working conditions from full-time to part-time, the number of hours worked in the 3rd quarter of 2009 fell by an annual 27.3%, while labour costs fell during the same time period by 30.1%. This fall in disposable income, and the continuing prolongation thereof, poses a far greater threat to the continuity of Latvian loan payments than the 15% reduction in the value of the Lat as compared to the Euro which the IMF proposed in the autum of last year would have done. Indeed, it is, in and of itself, one of the pernicious consequences of having resigned yourself to an "L" shape non-recovery. Stress on the banking system only goes up and up, as incomes and employment fall, and the government has less and less ammunition left to counteract the contractionary pressure./pbr /pIt is like sitting it out in freezing weather at the North Pole, in the vain hope that help will arrive. But help will not arrive, and the cruel truth about the post-crisis shock world we live in, is that nobody is coming to help you if you will not help yourself. In this sense, what Latvia doesn't need is more international borrowing (hasn't there been enough of that already) but some kind of meaningful strategy to start paying back the debt. But this means putting people back to work, and selling abroad, and financing Latvian lending from Latvian savings, and not pleading for yet more capital inflows to finance non-productive activities (attracting investment would be another matter, but as things stand right now the environment is far from "appetising", and according to the latest data from the Statistics Office, non-financial investment in Latvia was only 402.8 mln lats in the third quarter, a fall of 39% on the 3rd quarter of 2008).br /br /And just to be clear, what we have seen to date is not a 30% drop in unit labour costs (which would, of course, mean a great boost to competitiveness), rather it is a drop in earnings due to the fact that the output people could have produced just isn't needed, since no one is willing and able to buy it. In fact according to the data of the Statistics Office to hourly labour costs fell by only 3.9% in the 3rd quarter when compared with the same period a year earlier. Hardly a massive drop, and especially not when the large annual increases of ealier quarters are taken into account (see chart below). The internal devaluation has a long course still to run!/pa href="http://2.bp.blogspot.com/_ngczZkrw340/SzJ5kKARKGI/AAAAAAAAP3U/wlnlwuR8VrI/s1600-h/Latvia+hourly+labour+costs.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 182px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418526963747858530" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SzJ5kKARKGI/AAAAAAAAP3U/wlnlwuR8VrI/s400/Latvia+hourly+labour+costs.png" //abr /br /strongPensions Dilemma/strongbr /br /But Latvia is back in the news today for more reasons, since the constitutional court has just ruled against the government pension cuts, drawing a question mark over Latvia's ability to meet the terms of its international lending commitments.br /br /"The decision to cut pensions violated the individual's right to social security and the principle of the rule of law," the court said in its judgement, which cannot be appealed. The pension cuts - in place since July - formed a vital part of the Latvian government's list of austerity measures, as it struggles comply with terms of the IMF-lead bailout, and the constitutional inability to implement them is another hammer blow against the credibility of the current Latvian administration.br /br /a href="http://www.baltic-course.com/eng/legislation/?doc=21859"According to the Baltic Course/a, Valdis Dombrovskis told Latvian State Radio that the Constitutional Court's ruling on pensions must be carried out, and not debated. I am sure this will really come as music to the ears of people in Brussels and Washington. Basically pension reform forms a key part of the mid term strategy for sustainability of Latvian finances, and without the ability of the Latvian government to carry these out, then frankly the coherence of the whole strategy falls apart. If the Latvian constitution does not permit pension changes, then the Latvian constitution has to be changed, and the only surprising thing is that all this wasn't forseen when the initial loan negotiations took place in late 2008. Basically, it is impossible for the EU Commission and the IMF to accept any other view, since if any state could ring fence a whole part of social provision before entering debt negotiations, then non of the structural reform programmes could possibly work. This may seem harsh, but it is the price you have to pay for becoming insolvent as a society. Latvia's problems are NOT short term liquidity ones, but problems of the sustainability of an entire economic and demographic model, and, as in the case of Greece, these problems will not be solved by two or three years of (rather painful) fiscal deficit cosmetics. Real changes need to be made, and especially in raising the long term growth potential of the country, and frankly it is these changes which we have yet to see evidence for.br /br /The issue is not simply one of limping into the Euro in 2012, even if as Mark Griffiths, the IMF’s mission head in Latvia, a href="http://www.bloomberg.com/apps/news?pid=newsarchiveamp;sid=alXf8C.EvBCw"said in Riga last week/a the Latvian government does face a lot of “hard work” in trimming the budget deficit enough to qualify for euro adoption, and how much more so if they cannot constitutionally implement the cuts they agree to.br /br /br /blockquote“The key is meeting the deficit targets, and meeting the Maastricht criteria and euro adoption, that’s the path,” Griffiths said. “The government needs to work hard over the next year to find the measures which will deliver that adjustment to meet those targets. It’s going to be a challenging task.” /blockquoteOh yes, and Latvia was also in the news yesterday for another reason, since a href="http://www.bloomberg.com/apps/news?pid=newsarchiveamp;sid=aSlZ1iQtyoUA"Latvian stocks dropped the most among equity markets worldwide/a as small investors sold stocks before the government starts to tax investment gains. The OMX Riga Index fell as much as 4.3 percent to 271.55, its lowest intraday level since August 21. In dollar terms, the drop was the biggest among 90 benchmark indexes tracked by Bloomberg. The reason for the sell off was that Latvia’s 2010 budget includes measures which will impose taxes on dividends, gains from trading stocks and bonds and interest income. These measures were agreed to in order to ensure the continued transfer of the 7.5 billion-euro bailout from the European Commission and the International Monetary Fund.br /br /Latvian investors have increasingly sold their holdings ahead of the Dec. 31 deadline. Dividends and interest income will be taxed at 10 percent, while tax on gains from trading stocks and bonds will be 15 percent.br /br /strongAs Unemployment Climbs, Latvians Start To Pack Their Bags/strongbr /br /Finally one that wasn't in the news, but should have been, since while everyone knows that at 20.3% Latvia's unemployment is the highest in the European Union (see chart below), what they don't know is that more Latvian's than even are now being forced to leave their country in search of work.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SzJ-FflbpqI/AAAAAAAAP3c/ac2ro2Q9WhY/s1600-h/latvia+unemployment+rate.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 221px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418531934523074210" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SzJ-FflbpqI/AAAAAAAAP3c/ac2ro2Q9WhY/s400/latvia+unemployment+rate.png" //abr /br /According to a href="http://www.bank.lv/eng/main/all/sapinfo/commentary/unemployment_emigration/"a report by Oļegs Krasnopjorovs/a, economist with the Bank of Latvia, during the first half of 2009 8,300 Latvian residents left for Great Britain, a twofold increase over the year earlier period. 3,600 people emigrated to crisis-ridden Ireland in the first 11 months of 2009 - 3% more year-on-year. Among the new EU member states, Latvia has seen the sharpest increase in emigration to these two countries.br /br /According to Krasnopjorovs, the data (which comes from the UK and Irish social security systems) confirm the trend identified by the Latvian Statistics Office, who examined data on long-term migration. In the first ten months of 2009, the number of long-term emigrants was 6,300, up 18% more year-on-year; moreover the steepest rise took place in the last few months, reaching a ten-year peak. For several years now the number of emigrants has exceeded that of immigrants in Latvia, with the exception of the second half of 2007 when a sharp rise in salaries and a steep drop in unemployment were fuelled by the credit and construction boom, leading to labour force shortages and the expectation that incomes would rise even further.br /br /br /strongExports Still The Key/strongbr /br /The real problem here, of course, is that the Latvian economy remains mired in deep recession, and shows few signs of real recovery, something which is not surprising given that domestic consumption is in limbo land (where it is likely to stay), while the Prime Minister seems to attach little priority to boosting exports, and regaining competitiveness. Indeed, the contraction has rather gathered than lost momentum in recent months, and on a seasonally adjusted basis Latvian GDP fell another 4% between the second and third quarters of 2009. This was much faster than the 0.2% contraction between Q1 and Q2.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SzKJ0FPc7XI/AAAAAAAAP30/ev0iu8latOU/s1600-h/Latvia+GDP+QoQ.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 241px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418544829533318514" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SzKJ0FPc7XI/AAAAAAAAP30/ev0iu8latOU/s400/Latvia+GDP+QoQ.png" //abr /br /Year on year Latvian GDP fell by 19.0% in the third quarter.The decrease was largely due to a 28.7% drop in external trade (share in GDP 15.6%), a 18.2% one in transport and communications (12.5% GDP share), an 17.4% fall in manufacturing (10.2% GDP share, incredible) and by a 36% drop in construction (7.5% GDP share, not far below manufacturing).br /br /Private final consumption fell by 28.1%. Government final consumption decreased by 12.4%, while expenditure on gross capital formation fell 39.4%. Goods exports (68.2% of total exports) fell by 11.7% and services exports by 20.5%. Goods imports (82.1 % of total imports) were down much more sharply - by 36.6% -and services imports by 29.1%. Which meant net trade was positive, otherwise the fall in GDP would have been greater, and nearer to the levels seen in domestic demand.br /br /And entering the fourth quarter there were few signs of any real improvement. Retail sales fell in October by 1.3% from September (on a seasonally adjusted, constant price basis).br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SzKMAIEcSMI/AAAAAAAAP4E/ut_qpO26GAw/s1600-h/latvia+retail+index.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 226px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418547235474131138" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SzKMAIEcSMI/AAAAAAAAP4E/ut_qpO26GAw/s400/latvia+retail+index.png" //abr /br /As compared to October 2008 sales were down by 29.1%. The drop was even larger in the non-food product group – 32.3%. According to Eurostat data, sales are now down nearly 35% from their April 2008 peak.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SzM2qfmJsyI/AAAAAAAAP40/hEo3Tstlais/s1600-h/Latvian+retail+sales+P2P.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 226px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418734880320762658" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SzM2qfmJsyI/AAAAAAAAP40/hEo3Tstlais/s400/Latvian+retail+sales+P2P.png" //abr /br /br /Industrial output, however, seems to be holding up a little better, and output has stabilised since the spring. The problem is that manufacturing industry is now such a small share in GDP that it will be hard to pull the entire economy on the basis of anything other than very strong rates of increase. Industrial production was up in October by 0.1% over September, marginal, but at least it wasn't a fall. Unfortunately most of the increase was in the energy sector, with electricity and gas up by 10.3%, mining and quarrying contracted, by 2.1% as did manufacturing, by 1.9%.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SzKMQjSlgDI/AAAAAAAAP4U/ITxjZ77x8WQ/s1600-h/Latvia+IP+index.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 225px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418547517659119666" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SzKMQjSlgDI/AAAAAAAAP4U/ITxjZ77x8WQ/s400/Latvia+IP+index.png" //abr /br /Compared to October 2008 industrial output was down by 13.5%, Output in manufacturing fell by 15.8%, in mining and quarrying by 11%, while in electricity and gas output was only down by 2%. Output is now down around 21% since the February 2008 peak.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SzKMMLYfJLI/AAAAAAAAP4M/MEF1JpIEQdc/s1600-h/Latvia+IP+P2P.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 225px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418547442521941170" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SzKMMLYfJLI/AAAAAAAAP4M/MEF1JpIEQdc/s400/Latvia+IP+P2P.png" //abr /There is one positive glimmer on the Latvian horizon at the present time, and that is, of course, exports which were up by more than 4.4% (or 31.7 mln lats) when compared with September.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SzKMba5iGtI/AAAAAAAAP4c/SwDJmPRE_pE/s1600-h/Latvia+exports.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 259px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418547704385116882" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SzKMba5iGtI/AAAAAAAAP4c/SwDJmPRE_pE/s400/Latvia+exports.png" //abr /br /As a result, the surplus in the current account of Latvia's balance of payments reached 10.1% of gross domestic product (or LVL 327.9 million) in the third quarter. The surplus is however rather smaller than in the second quarter, which was 14.2% of GDP.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SzKMjQK9AZI/AAAAAAAAP4k/1UTgs-KnU-c/s1600-h/latvia+current+account.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 262px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418547838944346514" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SzKMjQK9AZI/AAAAAAAAP4k/1UTgs-KnU-c/s400/latvia+current+account.png" //abr /br /With export growth exceeding that of imports, the combined goods and services balance was positive for the second consecutive quarter, standing at 0.3% of GDP (or LVL 11.2 million). This effect is more due to services than to goods exports, since the goods trade balance is still in deficit (see chart), so there is still a long road to travel.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SzKM1nuWNII/AAAAAAAAP4s/01ylKpAlSwY/s1600-h/Latvia+trade+deficit.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 260px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418548154504459394" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SzKM1nuWNII/AAAAAAAAP4s/01ylKpAlSwY/s400/Latvia+trade+deficit.png" //abr /The largest third quarter capital inflows registered under the capital and financial account were the result of government borrowing from the IMF-lead support programme. There was some new foreign direct investment in Latvian companies to the amount of LVL 370.2 million, which to some extent offset direct investment outflows. Net external debt shrank by LVL 0.5 billion in nominal terms, but due to the fall in GDP (as I explained earlier) the ratio of net external debt to GDP posted only a tiny drop, reaching 56.4%, and gross external debt to GDP (excluding foreign assets) was up, reaching 145.8%.br /br /So, as I say, a start has been made, even if there is still a long, long road to travel. Internal devaluation is the chosen path of the Latvian people, the best thing I can suggest at this point is to get it moving in earnest (in fact there is some evidence from November producer prices that the rate of price fall is now accelerating), and that Latvia's leaders start to value what they have (that is, export potential) instead of dreaming of what they can no longer have (dynamic domestic consumption driving growth). Living in the past is never a good idea, not even in the sentimental moments of Yuletide. A Merry Xmas to you all!div class="blogger-post-footer"img width='1' height='1' src='https://blogger.googleusercontent.com/tracker/1443720106009957151-2824083105387014130?l=easterneuropeeconomy.blogspot.com' alt='' //div]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/latvia-is-back-in-the-news-and-expect-more-to-come/feed/</wfw:commentRss>
		<slash:comments>1</slash:comments>
		</item>
		<item>
		<title>The Top 11 most nonsensical Top 10 lists from organisations that discredit themselves by making a Top 10 list</title>
		<link>http://www.straightstocks.com/investing-lessons/the-top-11-most-nonsensical-top-10-lists-from-organisations-that-discredit-themselves-by-making-a-top-10-list/</link>
		<comments>http://www.straightstocks.com/investing-lessons/the-top-11-most-nonsensical-top-10-lists-from-organisations-that-discredit-themselves-by-making-a-top-10-list/#comments</comments>
		<pubDate>Wed, 23 Dec 2009 21:53:15 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Asia]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.22640</guid>
		<description><![CDATA["Well, it's one louder, isn't it? It's not ten. You see, most blokes, you know, will be playing at ten. You're on ten here, all the way up, all the way up, all the way up, you're on ten on...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/the-top-11-most-nonsensical-top-10-lists-from-organisations-that-discredit-themselves-by-making-a-top-10-list/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Reviewing the Russia-Venezuela-Cuba-China-Iran nexus</title>
		<link>http://www.straightstocks.com/investing-lessons/reviewing-the-russia-venezuela-cuba-china-iran-nexus/</link>
		<comments>http://www.straightstocks.com/investing-lessons/reviewing-the-russia-venezuela-cuba-china-iran-nexus/#comments</comments>
		<pubDate>Tue, 15 Dec 2009 18:35:31 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.22534</guid>
		<description><![CDATA[Jaime Suchlicki, Director of the University of Miami's Institute for Cuban and Cuban-American Studies, has a paper summarising the Russia-Venezuela-Cuba-China-Iran relationship entitled, "The Cuba-Venezuela Challenge to Hemispheric Security: Implications for the United States." Most of it will not come as...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/reviewing-the-russia-venezuela-cuba-china-iran-nexus/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Putin to Berlusconi:  You&#8217;re a &#8220;Real Man&#8221;</title>
		<link>http://www.straightstocks.com/investing-lessons/putin-to-berlusconi-youre-a-real-man/</link>
		<comments>http://www.straightstocks.com/investing-lessons/putin-to-berlusconi-youre-a-real-man/#comments</comments>
		<pubDate>Tue, 15 Dec 2009 17:57:48 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.22533</guid>
		<description><![CDATA[My only excuse in publishing an excerpt from this FT piece was the brief mention of Putin's message to Italian PM Silvio Berlusconi following the violent attack he suffered.&#160; No matter what I think of his politics, there's nothing funny...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/putin-to-berlusconi-youre-a-real-man/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Russia&#8217;s Containment of NATO</title>
		<link>http://www.straightstocks.com/investing-lessons/russias-containment-of-nato/</link>
		<comments>http://www.straightstocks.com/investing-lessons/russias-containment-of-nato/#comments</comments>
		<pubDate>Mon, 14 Dec 2009 16:58:23 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.22512</guid>
		<description><![CDATA[An editorial in today's Guardian argues that although NATO shouldn't have to put it in writing that Ukraine and Georgia will never be members, it should halt its expansion because Russia doesn't like it and there are various conflicts they...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/russias-containment-of-nato/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Poland-Germany Relations Key to E.U.-Russia Balance</title>
		<link>http://www.straightstocks.com/investing-lessons/poland-germany-relations-key-to-e-u-russia-balance/</link>
		<comments>http://www.straightstocks.com/investing-lessons/poland-germany-relations-key-to-e-u-russia-balance/#comments</comments>
		<pubDate>Fri, 04 Dec 2009 16:34:22 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Commission of European Communities;]]></category>
		<category><![CDATA[director]]></category>
		<category><![CDATA[European Union]]></category>
		<category><![CDATA[Germany]]></category>
		<category><![CDATA[Institute of Public Affairs]]></category>
		<category><![CDATA[Jacek Kucharczyk]]></category>
		<category><![CDATA[Judy Dempsey]]></category>
		<category><![CDATA[North Atlantic Treaty Organization]]></category>
		<category><![CDATA[Poland]]></category>
		<category><![CDATA[Soviet Union]]></category>
		<category><![CDATA[Warsaw]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.22387</guid>
		<description><![CDATA[A very interesting perspective from Judy Dempsey in the New York Times on the importance of Poland's rapproachement with Germany, and how this would play into the European Union's relations with Russia.&#160; There is growing support behind a policy shift...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/poland-germany-relations-key-to-e-u-russia-balance/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Russia&#8217;s Economy Slows In November</title>
		<link>http://www.straightstocks.com/investing-lessons/russias-economy-slows-in-november-2/</link>
		<comments>http://www.straightstocks.com/investing-lessons/russias-economy-slows-in-november-2/#comments</comments>
		<pubDate>Fri, 04 Dec 2009 13:28:00 +0000</pubDate>
		<dc:creator>Edward Hugh</dc:creator>
				<category><![CDATA[Economics]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[activity]]></category>
		<category><![CDATA[activity index]]></category>
		<category><![CDATA[Dubai]]></category>
		<category><![CDATA[Eastern Europe]]></category>
		<category><![CDATA[eastern europe economy watch]]></category>
		<category><![CDATA[Economic Contraction]]></category>
		<category><![CDATA[gdp indicator]]></category>
		<category><![CDATA[HEIGHT]]></category>
		<category><![CDATA[href]]></category>
		<category><![CDATA[interest rate reductions]]></category>
		<category><![CDATA[month]]></category>
		<category><![CDATA[rate]]></category>
		<category><![CDATA[retail lending;]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[s1600]]></category>
		<category><![CDATA[service sectors]]></category>
		<category><![CDATA[steady advance]]></category>
		<category><![CDATA[WIDTH]]></category>

		<guid isPermaLink="false">tag:blogger.com,1999:blog-1443720106009957151.post-2036230547945223940</guid>
		<description><![CDATA[As a href="http://www.bloomberg.com/apps/news?pid=newsarchiveamp;sid=aMzKBq0lD89g"doubts grow/a that in the post Dubai world Russia's central bank will be able to sustain a great deal of momentum in its ongoing programme of interest rate reductions, we learn this week that the pace of expansion in Russia's economy slowed back in November, following two months of steady advance in September and October. This time services activity also weakened its advance while manufacturing activity registered its second month of contraction. Yet the central bank may well show increasing restraint in lowering interest rates, even as the economy slows, the ruble rises, and bank retail lending continues to fall, having declined for nine consecutive months up to and including October, while corporate lending dropped for a second month in a row and hasn’t risen for six months (for more on the particular topic see my recent post - a href="http://russiatooat.blogspot.com/2009/11/russias-consumers-get-carried-onwards.html"Are Russia's Consumers Getting "Carried Away" With Themselves?/a). br /br /While the seasonally adjusted VTB Capital Total Activity Index remained in positive territory for the fourth month running in November, the latest figure of 52.8 indicated the weakest rate of growth in three months.br /br /br /pa href="http://1.bp.blogspot.com/_ngczZkrw340/SxkCb-yWhOI/AAAAAAAAPtI/iBEKiQO9-vE/s1600-h/GDP+indicator+3.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 241px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5411359106996274402" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SxkCb-yWhOI/AAAAAAAAPtI/iBEKiQO9-vE/s400/GDP+indicator+3.png" //abr /br /The VTB Capital Monthly GDP Indicator, based on the PMI surveys for both the manufacturing and service sectors, continued to show an annual economic contraction in November, even if the the rate of decline eased for yet another month. At an annual minus 2.5%, down from a revised minus 4.0% in October, the indicator stood at its highest level since December 2008. Over the third quarter as a whole, the GDP Indicator suggested that the economy contracted by a revised 8.7% year-on-year, a better outcome than the record 9.9% fall posted during Q2. Data for the first two months of the final quarter show an average contraction of 3.3%.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SxkGCy3IoWI/AAAAAAAAPtQ/oni8UcBHc5U/s1600-h/GDP+indicator+2.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 244px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5411363072344891746" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SxkGCy3IoWI/AAAAAAAAPtQ/oni8UcBHc5U/s400/GDP+indicator+2.png" //abr /By contrast the quarter-on-quarter rate slipped back to a bare 0.2%, treacherously close to the dividing line between contraction and expansion.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SxkGhQ_2PfI/AAAAAAAAPtY/AT837r4JbKA/s1600-h/GDP+Indicator+One.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 245px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5411363595830574578" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SxkGhQ_2PfI/AAAAAAAAPtY/AT837r4JbKA/s400/GDP+Indicator+One.png" //abr /br /The outcome is not surprising when we take into account that November saw an overall deterioration in business conditions in Russian manufacturing for the second month running. Output rose only marginally, while incoming new orders fell for the first time since June. Growth of purchasing activity was maintained, but at a slow pace, while employment continued to fall. Thus the headline seasonally-adjusted Russian Manufacturing PMI remained below the no-change mark of 50.0 for the second month running, and although the November figure of 49.1 indicated only a marginal rate of deterioration, it was still slightly worse one than the 49.6 posted in October. The fall in the PMI primarily reflected slower output growth and falling new orders.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SxgPHWNdsXI/AAAAAAAAPrQ/V9qfvFm9uaE/s1600-h/russia.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 247px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5411091571181203826" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SxgPHWNdsXI/AAAAAAAAPrQ/V9qfvFm9uaE/s400/russia.png" //abr /br /Business conditions in the Russian service sector, on the other hand, continued to improve during the month, albeit at a weaker pace than previously. The easing primarily reflected slower rates of growth in business activity and new business, which both remained well below pre-crisis levels. Meanwhile, inflationary pressures remained subdued, with input prices rising at a relatively weak rate and charges falling slightly for the second month running. /ppbr /The headline seasonally adjusted Russian Services PMI came in at 53.3, down on the 54.3 registered in October, and well below the historic average of 56.9, highlighting the fragility of the Russian recovery. Restricted credit continued to be a theme in this months survey responses, although sector data pointed to a stronger rise in financial intermediation activity. The rate at which incoming new business increased slowed during the month and contributed to additional spare capacity at service providers and a faster decline in outstanding business. Backlogs of work have contracted every month since September 2008, and the latest rate of decline was at the most rapid rate since July.br /br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/Sxj_lA1LRhI/AAAAAAAAPtA/RpvXLtkq7Hc/s1600-h/russia.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 243px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5411355963628930578" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/Sxj_lA1LRhI/AAAAAAAAPtA/RpvXLtkq7Hc/s400/russia.png" //abr /br //pdiv class="blogger-post-footer"img width='1' height='1' src='https://blogger.googleusercontent.com/tracker/1443720106009957151-2036230547945223940?l=easterneuropeeconomy.blogspot.com' alt='' //div]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/russias-economy-slows-in-november-2/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Chechnya murders make FP&#8217;s Top 10 missed stories of 2009</title>
		<link>http://www.straightstocks.com/investing-lessons/chechnya-murders-make-fps-top-10-missed-stories-of-2009/</link>
		<comments>http://www.straightstocks.com/investing-lessons/chechnya-murders-make-fps-top-10-missed-stories-of-2009/#comments</comments>
		<pubDate>Wed, 02 Dec 2009 17:37:48 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Ali Osayev]]></category>
		<category><![CDATA[car bombings]]></category>
		<category><![CDATA[Caucasus]]></category>
		<category><![CDATA[Chechnya]]></category>
		<category><![CDATA[Istanbul]]></category>
		<category><![CDATA[Joshua Keating]]></category>
		<category><![CDATA[president]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.22362</guid>
		<description><![CDATA[Ranking at number 8, I will let Joshua Keating's words speak for themselves: The world was shocked in July by the murder of human rights activist Natalya Estemirova in Chechnya. Suspicions immediately focused on the Chechen Kremlin-backed strongman, Ramzan Kadyrov,...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/chechnya-murders-make-fps-top-10-missed-stories-of-2009/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Portraits worth thousands of words</title>
		<link>http://www.straightstocks.com/investing-lessons/portraits-worth-thousands-of-words/</link>
		<comments>http://www.straightstocks.com/investing-lessons/portraits-worth-thousands-of-words/#comments</comments>
		<pubDate>Wed, 02 Dec 2009 02:47:25 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Asia]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Ban Ki Moon]]></category>
		<category><![CDATA[Medvedev Yushchenko]]></category>
		<category><![CDATA[New York]]></category>
		<category><![CDATA[Paul Kagame;]]></category>
		<category><![CDATA[Photographer]]></category>
		<category><![CDATA[president]]></category>
		<category><![CDATA[Richard Avedon]]></category>
		<category><![CDATA[Robert Mugabe]]></category>
		<category><![CDATA[Rupiah Banda]]></category>
		<category><![CDATA[Rwanda]]></category>
		<category><![CDATA[Silvio Berlusconi]]></category>
		<category><![CDATA[The New Yorker Magazine]]></category>
		<category><![CDATA[United Nations General Assembly]]></category>
		<category><![CDATA[Victor Yushchenko]]></category>
		<category><![CDATA[Zambia]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.22355</guid>
		<description><![CDATA["A photographic portrait is a picture of someone who knows he's being photographed, and what he does with this knowledge is as much a part of the photograph as what he's wearing or how he looks. He's implicated in what's...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/portraits-worth-thousands-of-words/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>With the Theft of Yukos, What Goes Around, Comes Around</title>
		<link>http://www.straightstocks.com/investing-lessons/with-the-theft-of-yukos-what-goes-around-comes-around/</link>
		<comments>http://www.straightstocks.com/investing-lessons/with-the-theft-of-yukos-what-goes-around-comes-around/#comments</comments>
		<pubDate>Tue, 01 Dec 2009 14:45:37 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Belarus]]></category>
		<category><![CDATA[central Asia]]></category>
		<category><![CDATA[Commission of European Communities;]]></category>
		<category><![CDATA[energy trade]]></category>
		<category><![CDATA[European Centre for International Political Economy]]></category>
		<category><![CDATA[Fredrik Erixon]]></category>
		<category><![CDATA[gas market]]></category>
		<category><![CDATA[Gazprom]]></category>
		<category><![CDATA[Iana Dreyer]]></category>
		<category><![CDATA[Jason Bush;]]></category>
		<category><![CDATA[player]]></category>
		<category><![CDATA[Ukraine]]></category>
		<category><![CDATA[USD]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.22343</guid>
		<description><![CDATA[Today we are seeing a lot of interesting discussions on yesterday's court decision which found that Russia is still bound by the Energy Charter Treaty, making them potentially liable in a suit being brought by Yukos shareholders for the expropriation...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/with-the-theft-of-yukos-what-goes-around-comes-around/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Are Russia&#8217;s Consumers Getting &#8220;Carried Away&#8221; With Themselves?</title>
		<link>http://www.straightstocks.com/investing-lessons/are-russias-consumers-getting-carried-away-with-themselves-2/</link>
		<comments>http://www.straightstocks.com/investing-lessons/are-russias-consumers-getting-carried-away-with-themselves-2/#comments</comments>
		<pubDate>Thu, 26 Nov 2009 14:26:00 +0000</pubDate>
		<dc:creator>Edward Hugh</dc:creator>
				<category><![CDATA[Economics]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Bank]]></category>
		<category><![CDATA[Central Banks]]></category>
		<category><![CDATA[chief economist]]></category>
		<category><![CDATA[consumer]]></category>
		<category><![CDATA[country briefings]]></category>
		<category><![CDATA[Deputy Economic]]></category>
		<category><![CDATA[Eastern Europe]]></category>
		<category><![CDATA[eastern europe economy watch]]></category>
		<category><![CDATA[Erik Berglof;]]></category>
		<category><![CDATA[hammer blows]]></category>
		<category><![CDATA[Iceland]]></category>
		<category><![CDATA[inflation]]></category>
		<category><![CDATA[Minister Andrei Klepach]]></category>
		<category><![CDATA[nominal interest rates]]></category>
		<category><![CDATA[percent]]></category>
		<category><![CDATA[price bubbles]]></category>
		<category><![CDATA[Price;]]></category>
		<category><![CDATA[rate]]></category>
		<category><![CDATA[rates russia]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Serbia]]></category>
		<category><![CDATA[Standard Chartered Bank]]></category>
		<category><![CDATA[Standard Chartered Bank Plc]]></category>
		<category><![CDATA[Ukraine]]></category>

		<guid isPermaLink="false">tag:blogger.com,1999:blog-1443720106009957151.post-4988805055748787424</guid>
		<description><![CDATA[blockquote“Cutting rates by 50 basis points here and there is not going really diminish the appeal of the ruble,” said Manik Narain, an emerging markets strategist at Standard Chartered Bank Plc in London. “In terms of nominal interest rates Russia (at 9% as of 24 November) is still offering the highest yields in the emerging market space and in an environment where oil prices are remaining relatively well supported we think that the ruble will continue to be seen as an attractive way to position for global recovery,” /blockquotepbr /The world's central banks are having a hard time of it these days, having just gotten through the worst banking and financial crisis in living memory they now face a growing dilema between continuing to give support to the developed economies (which are yet to recover from those early hammer blows) and the danger of creating fresh global asset price bubbles in emerging economies, asset bubbles which could easily be being fuelled by low US interest rates and a weak dollar. The latest warning in this respect comes not from Nouriel Roubini (or even from me, a href="http://fistfulofeuros.net/afoe/economics-country-briefings/the-dollar-as-a-funding-currency/"but see this post/a, and a href="http://www.forexblog.org/2009/11/interview-with-edward-hugh-the-dollars-demise-is-vastly-overstated.html"this recent interview I gave on Forex Blog/a), rather it emmanates from Germany’s new finance minister, Wolfgang Schäuble. His comments - which were a href="http://www.ft.com/cms/s/0/4ec41a1a-d616-11de-b80f-00144feabdc0.html"cited in last Saturday's Financial Times/a - highlight official concern in Europe that the exceptional steps taken by central banks and governments to combat the crisis carry with them a series of undesireable side effects.br /br /Such openly expressed concerns only add further weight to a href="http://www.ft.com/cms/s/0/85f1fac2-d1dc-11de-a0f0-00144feabdc0.html"recent statements made in China/a, where only a week ago the banking regulator Liu Mingkao explicitly criticised the US Federal Reserve for indirectly fuelling the “dollar carry-trade” – a process whereby investors borrow dollars at ultra-low interest rates in the United States and the invest them in higher-yielding assets abroad.br /br /Wolfgang Schäuble went even further, saying it would be “naive” to assume the next asset price bubble would look just like the last one. “More likely today is a scenario in which excess liquidity globally creates a new [sort of] asset market bubble.” he said, and the fact “ that low interest rate currencies such as the US dollar increasingly being used as a basis for currency carry trades should give pause for thought. If there was a sudden reversal in this business, markets would be threatened with enormous turbulence, including in foreign exchange markets.”br /br /As I argued in my last post on the carry trade, the danger of a short term sudden reversal may be being overstated at this point, since exit from emergency life support will be at best slow and measured in the United States, while ample funding will continue to remain available in Japan, where the central bank a href="http://www.ft.com/cms/s/0/c3a3be3e-d608-11de-b80f-00144feabdc0.html"has now formally recognised that the economy is once more back in deflation/a (officially it exited in 2006, and the Bank did manage to summon up a full half percentage point worth of interest rate rise before falling back towards zero again, but in reality, if we strip out the oil price impact, the sad truth is that Japan never really left deflation).br /br /However, regardless of whether or not we are running the danger of having an overly rapid unwind effect, untold damage is in fact being done, with the structural distortions being produced by the massive “wall of liquidity” which is currently sweeping the planet being evident enough, showing up as it is in some unexpected places, like Russia for example.br /br /br /strongRuble Once More On The Rise/strongbr /br /On the face of it the idea that investors who were rushing for the Russian door following the Roki tunnel incursion back in August 2008 may now be rushing back in again may seem hard to believe, particularly given the serious economic recession which followed, and in reality it isn’t quite like this, but what is clear is that a steady and significant flow of funds is now most definitely heading in Russia’s direction - even if the immediate objective is not to increase what Russia most definitely needs, namely capital investment.  A brief glance at the charts for movements in the ruble vis a vis the US dollar (see below) shows immediately what has been happening. After hitting a low of $31.39 on September 2 the ruble has been steadily rising, and was at $28.65 on November 11, since which time it has been hovering, as investors vacilate waiting to see where policy and the currency go from here./ppa href="http://1.bp.blogspot.com/_ngczZkrw340/Sw4pa3BFLiI/AAAAAAAAPow/4p8N8w7-NNQ/s1600/rouble+2.png" /ppimg style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 240px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408305743940365858" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Sw4pa3BFLiI/AAAAAAAAPow/4p8N8w7-NNQ/s400/rouble+2.png" //a At the same time, if we look at movements in the ruble-USD over a longer period of time (2 years in the chart below) it is plain the the ruble hit bottom on 4 February 2009 at $36.22 after falling steadily from 17 July 2009 when it touched $23.25./pp /ppbr //ppa href="http://3.bp.blogspot.com/_ngczZkrw340/Sw4pXI2mHVI/AAAAAAAAPoo/UTsQ29_bkVA/s1600/rouble+one.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 244px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408305680008748370" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Sw4pXI2mHVI/AAAAAAAAPoo/UTsQ29_bkVA/s400/rouble+one.png" //abr /br /In fact, as I say, while it is clear that Russia is on the receiving end of a steady inflow of funds, it is far from clear that these funds are of the kind she most needs at this point. Much of the money has been going into stocks, and Russian equity funds drew record amounts at the end of October, according to data provided by EPFR Global. In fact Bloomberg data show that the ruble has been the second-best performer among emerging market currencies after the Chilean peso over the past three months, gaining 8.7 percent in the period. And even foreign currency purchases from the central bank and lowering interest rates systematically to a record low (in Russian terms) has not worked. Indeed Russia's foreign currency reserves have now risen to $441.7 billion (as of Nov. 13) compared with the low of $376.1 billion reached on March 13. Whilethe Micex Stock Index has gained 116 percent this year, making the Index the best-performing benchmark equity measure globally since January (in local currency terms), again according to Bloomberg data.  br /br /In comparison Russia’s foreign direct investment plummeted an annual by 48.1 percent, the most on record, to just $10 billion in the first nine months of the year, while overall foreign investment, including credits and flows into securities markets, was $54.7 billion, down 27.8 percent when compared with the same period a year earlier,according to Federal Statistics Service data. Other foreign investments, including loans from foreign banks and Russian companies’ foreign divisions, were down 20.9 percent in the period to $43.7 billion. The consequence of all this is that the decline in investment activity has been - as can be seen in the GDP growth components chart below - perhaps the greatest single drag on the domestic Russian economy over the past twelve months.br /br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/Swq58CA-BvI/AAAAAAAAPnI/A-avWTMjlnI/s1600/russia+growth+components.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 297px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5407338743595927282" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Swq58CA-BvI/AAAAAAAAPnI/A-avWTMjlnI/s400/russia+growth+components.png" //abr /br /But, as I am stressing  this earlier overall impression of Russia as a country with problems of net capital flight now no longer gives us a precise up-to-date picture because, in a reversal of the earlier pattern Russia has seen, since mid September, significant capital inflows. In this sense some of the aggregate flow data is misleading, and even while the pressure from foreign lenders to repay sindicated loans continues and Russian borrowers continue to have difficulty  rolling over their debt, the aggregate capital flow data to some extent masque a change in the underlying structure of Russian external debt - here, as ever, the devil lies in the details. As Guillaume Tresca, a Paris-based emerging market strategist with Credit Agricole’s Caylon Unit, argues the mounting weight of that huge wall of liquidity sweeping the planet means that something somewhere has to give, with the consequence that the Russian authorities are now under severe pressure to accept the inevitability of short term ruble appreciation since even though they “will try to do what they can to smooth the process, it’s very hard for them to go against the flow” since current “capital inflows are massive.”br /br /In fact a growing consensus seems to be now emerging that Russia’s central bank will find itself forced to accept a stronger ruble next year as the devastating cocktail of rising commodity prices and abundant liquidity simply prove to be too powerful a force for policy makers to counter. So while representatives of the Russian administration have repeatedly asserted that they will do all they can to cap the ruble’s advance, all may well not be enough, despite Vladimir Putin's repeated declarations that his government won’t allow excessive appreciation in a bid to give some support to struggling exporters. The Canute like task of driving back the ocean is hardly an easy one, and, as the IMF itself recently warned, all efforts to fight the ruble’s advance may simply prove to be “unproductive.”br /br /The problem has recently become even more complicated since, in the short term at least, letting the rouble rise also has its attractions for a Russian administration faced with simmering popular frustration with their inability to get the ongoing economic contraction fully under control. A rising ruble means slower inflation and more spending power for domestic consumers, consumers who have yet to get over the record 10.9 percent economic contraction which hit them in the second quarter. Given that the nine interest rate cuts introduced by the central bank since April have manifestly failed to unlock the credit flow to consumers as banks hold back their lending on concern borrowers can’t repay their debt (see chart below) a rising exchange rate certainly seems to be worth a second look as a way forward, since while a higher exchange rate coupled with near double digit inflation may cripple manufacturing competitiveness, it does transfer incomes directly into people’s pockets, something hard pressed politicians might see as quite beneficial.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/Swv02_RS5BI/AAAAAAAAPnQ/EGbBRnSLgsk/s1600/russia+credit+growth.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 327px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5407685003122500626" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Swv02_RS5BI/AAAAAAAAPnQ/EGbBRnSLgsk/s400/russia+credit+growth.png" //a br /br /Lending is still - as can be seen in the above chart prepared by the World Bank for its latest report - a problem, and corporate (or non-financial corporation lending) fell by 0.7 percent in September from August continuing the ongoing decline. Lending to households dropped 1.1 percent making the eighth consecutive monthly decline, with year on year levels now in negative territory, while non performing retail loans rose, climbing to 6.4 percent from 6.2 percent.br /br /And the World Bank expect the many bank balance sheets will continue deteriorating as the share of non-performing loans increases. “In the environment of increasing credit risks, lending activities by the banks have remained limited despite improving liquidity conditions in the economy and continuing monetary loosening.” Bad debts in the banking industry may reach an average of 10 percent by the end of the year according to the Bank.br /br /br /And when we look at ruble realities, as the IMF point out, efforts to stem the ongoing rise with intervention are far from being able to give the desired result. Bank Rossii bought a net $15.2 billion and 485 million euros in October, their largest foreign currency purchases since May, and went on to buy $6 billion during the first 17 days of November according to press reports citing central bank chairman, Sergey Ignatiev. Yet last week the Russian the ruble ended 0.1 percent higher at 35.0632 against the central bank’s target currency basket, its strongest level since December 23 2008. The ruble appreciated 3.4 percent in October against the dollar (for its second consecutive monthly gain) and has risen more than 1 percent so far in November. Thus the central bank has now moved on to use monetary policy to try and stem the rise, and said on October 29 that it would also use interest rates in an attempt to reduce the “attractiveness of short-term investments in Russian assets and stop the accumulation of risk”.br /br /The recent rise follows ruble a 35 percent slump against the dollar between August last year and January, raising the cost of imports (which make up about 49 percent of the consumer goods sold in Russia) and, in theory, making Russia's domestic industry somewhat more competitive externally. However, without a sound institutional infrastructure, and a coherent monetary policy, short term devaluation gains can easily be turned into medium term inflation, thus defeating the purpose of corrective price devaluation.br //pp/pbr /br /br /pThe current problems are not of recent making, but are the logical end product of steady and systematic long term mismanagement of Russia's monetary policy, a mismanagement which has now created a veritable Procrustean bed of problems for both Russia's economy and the wider society. Warnings were frequent enough, but went unheaded, and the continuing failure  to address the underlying inflation problem between 2005 and 2008 now means that large structural distrortions have been accumulated in the economy, including a massive one of commodity export dependence, a problem which effectively turned the country into a veritable disaster waiting to happen if ever there should be a protracted lull in the secular rise in energy prices. That lull has most definitely now arrived, since while it is obvious that Russia's short term future depends  on energy prices, it is far from clear what the future holds for those energy prices themselves. /pbr /pa href="http://3.bp.blogspot.com/_ngczZkrw340/Swv5min3eZI/AAAAAAAAPnY/rqDWKGy7ABg/s1600/world+bank+oil.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 283px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5407690218112776594" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Swv5min3eZI/AAAAAAAAPnY/rqDWKGy7ABg/s400/world+bank+oil.png" //abr /br /Weak global demand for oil has led to a sharp rise in excess capacity and OPEC's spare capacity has risen to levels not seen since 2002, when prices averaged USD25/barrel with OPEC’s pricing power staying very low. Up to now oil prices have remained in the USD70/barrel range, supported by OPEC output restraint and its stated desire to have prices reach what it calls "a comfortable level" - ie near USD75/barrel - as well as by expectations of rising demand. At its September 2009 meeting, OPEC left its production quotas unchanged but indicated it would take rapid action if prices dropped sharply. OPEC production, however, continues to edge higher, with compliance to its combined cuts of 4.2 million barrels per day falling to 66 percent in September from 71 percent in August. Thus there is evidence of OPEC strains and there is considerable uncertainty about real levels of 2010 demand, all of which makes for considerable uncertainty about prices. As can be seen in the above chart, World Bank oli price estimates (like their economic growth ones) have fluctuated, and have moved from a price estimate in March of around $62.95 for 2010 to the current (November) expectation of $75.29. While the earlier estimate may certainly be considered to be on the low side, the current one may well be too high, and a level of around $70 may not be an unrealistic forecast. It should be noted however that there are credible dissenters, and in a more or less reasoned analysis Capital Economics suggest that oil prices could well fall back again in 2010 to average somewhere around $50. If this forecast were to prove to be anywhere near correct, the Russian economy is going to be subject to major downside risks, due in particular to the difficulties posed by:br /br /i) financing the fiscal deficitbr /ii) rising unemploymentbr /iii) growing bad loans in the banking systembr /iv) refinancing external debtbr /v) the continuing high level of consumer price inflation and the difficulties this poses for monetary policy at the central bankbr /br /Added to all this, the economy will clearly not rebound as easily as many seem to foresee, adding to the risk element on all fronts.br /br /br /strongA Return To Growth In The Third Quarter/strongbr /br /Following the deep output drop sustained in the first half of the year (10.4% of GDP year on year), the slow recovery in global demand and rise in commodity prices has helped lift Russia’s economy up from its earlier lows. But the recovery has only been a modest one, since preliminary data indicate that the economy still registered a 9.4 percent year-on-year drop in the thrid quarter, indicating only a very small improvement (possibly a seasonally adjusted 0.6%) over the second quarter. More recent data also point towards a rather uneven progression, with the manufacturing sector falling back while rising real incomes means that consumer demand is producing stronger growth in the services sector.br /br /As in other countries, investment (both foreign and domestic) took a severe hit on the back of the credit crunch, and gross capital formation was indeedthe main demand side factor dragging GDP down in the first half of the year (by 14 percentage points), followed at some distance by consumption, which contributed 1.2 and 3.0 percentage points to aggregate output contraction rates respectively in the first and second quarters. Net exports, on the other hand, made a positive contribution (5.1 percentage points in the first quarter and 5.9 percentage points in the second) although strongas elsewhere/strong the strongdrop in imports/strong was the key factor. When imports are looked at in volume (price adjusted) terms we find that real ruble depreciation (the real effective exchange rate depreciated by 5.9 percent in the first nine months of 2009) meant that the import contraction was more severe than it seemed, especially in the second quarter of 2009 when the drop in imports meant that net exports increased by 66 percent according to World Bank calculations.br /br /strongUnemployment Falls Back, But Problems Remain /strongbr /br /Six million Russians were added to the government’s official poverty count in the first quarter of this year alone, and by the end of 2009, 17.4 percent of the population or 24.6 million people will be living beneath the subsistence level of $185 per month, almost 5 percent more than before crisis, according to World Bank estimates. Unicredit analysts forecast that the number of Russians with disposable incomes of more than $1,000 per month will fall 48 percent this year to about 13.6 million, or roughly 9.6 percent of the population. Thus this recession is likely to have lasting and important results./pbr /pOn the hand, employment statistics from the Federal Statistics Service indicate that a sharp downward adjustment in the labour market took place up to February this year, before moderating and then reversing. Unemployment seems to have peaked in February at 9.5 percent following the sharp decline in output, and the severity of the blow was especially strong in the industrial sector. /pbr /pa href="http://1.bp.blogspot.com/_ngczZkrw340/Swv-srF1PgI/AAAAAAAAPng/ib8hHjWpxx8/s1600/russia+unemployment.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 201px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5407695821023297026" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Swv-srF1PgI/AAAAAAAAPng/ib8hHjWpxx8/s400/russia+unemployment.png" //abr /br /br /Since the beginning of March 2009, however, with real level of economic activity bottoming out (see above chart), the labor market continued to show moderate improvement: by September the number of those in employment had increased by 2.6 million, and the rate of unemployment fell to 7.6 percent, down significantly but still much higher than in September 2008 (5.8 percent). According to the World Bank this steady improvement is rather misleading as it reflects significant seasonal gains in employment and a shift in labor adjustment towards labor hoarding in the manufacturing sector.br /br /As the World Bank also notes, the long term regional differences in Russian unemployment rates are striking ranging from a low of 1.6 percent in Moscow to a high of 52.1 percent in Ingushetia in August 2009. Traditionally unemployment is largely concentrated in the Southern, Far Eastern and Siberian federal districts. However, the crisis related unemployment shows a different pattern, with the largest increases in unemployment being found in the North Western District (from 4.8 to 7 percent) and the Urals (from 4.9 to 8.1 percent). Regression analysis carried out by the World Bank revealed that unemployment levels were higher in those regions with higher levels of manufacturing, and where industrial production accounted for a larger share of GDP.br /br /And while it is entirely possible that the economy will show a “modest” recovery in the second half of 2009, this is “unlikely to have significant impact on social indicators,” according to the World Bank. Unemployment will increase to 9 percent “as seasonal factors wane” from 7.6 percent in September and it may take three years before the number of Russians living in poverty falls to pre-crisis levels, the World Bank estimates. Indeed, in the short term real incomes are “likely to fall further". /pbr /pstrongMonetary Policy Mess /strongbr /br /The political threat posed by growing unemployment and rising poverty must most certainly be one of the reasons behind Russia’s central bank recent decision to lowered its key interest rates for the eighth time in six months, in a bid to both stimulate lending and to stem the inflow of funds and the rise in the value of the ruble which is making the work of restoring competitiveness to the manufactured sector all the more difficult. Earlier this month Bank Rossii cut the refinancing rate to 9 percent from 9.5 percent and reduced the repurchase rate charged on central bank loans to 8 percent from 8.5 percent. Despite the reductions Russia still has the fourth-highest benchmark interest rate in Europe after Ukraine, Iceland and Serbia.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/Sw24Z-mJeJI/AAAAAAAAPog/dK4SaanO7nc/s1600/russia+interest+rates.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 230px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408181483981076626" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/Sw24Z-mJeJI/AAAAAAAAPog/dK4SaanO7nc/s400/russia+interest+rates.png" //abr /br /The best thing that can be said about Russian monetary policy instruments is that they are hopelessly ineffictive. Even October consumer-price growth at 9.7% annually, while well down on the  15.1 percent peak hit in June 2008, is still horribly unacceptable, and it is extremely hard to understand how economic mismanagement and incompetence can have reached such a level that an economy which has been contracting at the rate of nearly 10 per cent a year can still have this kind of price inflation. There is no other word for it, this is a mess.br /br /br /The bank is caught on the horns of a large dilema, since cutting rates further to stem inflows and the ruble rise may only risk fuelling more inflation, yet First Deputy Central Bank Chairman Alexei Ulyukayev stressed only this week (following the latest in rate decision)  that the central bank did not exclude the possibility of further cutting its rates since it sees “no inflationary risks” next year and  an inflation rate “much lower” than 9 percent. This follows explicit remarks at the end of October that the Bank was ready and willing to use interest rate policy as required to stem speculative capital flows that "threaten to undermine currency stability". br /br /strongInflation Woes/strongbr /br /One small consolation at least in this ongoing mess is that pressure on Russia’s producer prices have been easing, and factory gate prices have even been falling. According to the preliminary data from the State Statistics Service, the price of goods leaving factories and mines was in fact down an annual 10.8 percent in August following a record 12.3 percent drop in July. Evidently The with the 2008 spike in oil and energy prices the logic behind this is easy to see. What is not so easy to see is why domestic prices take so long in responding to general capacity utilisation signals and why the Economic Development Ministry still seems comfortable with the expectation that average inflation will range between 12 percent and 12.5 percent in 2009 only marginally down from last year’s 13.3 percent. Stunning!br /br //pbr /br /pa href="http://3.bp.blogspot.com/_ngczZkrw340/Sw0V_P4X0lI/AAAAAAAAPno/7WSwEAciAlg/s1600/russia+inflation.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 243px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408002903880749650" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Sw0V_P4X0lI/AAAAAAAAPno/7WSwEAciAlg/s400/russia+inflation.png" //abr /br /And while consumer price inflation has been tame in recent months this good behaviour may not last long, since it could rise more than expected in November, according to Deputy Economic Minister Andrei Klepach, who does not seem to completely share Alexei Ulyukayev price optimism.  Consumer prices could rise "by about 0.3% to 0.4%" in November, Klepach said in comments recently, and this prediction seems to be near the mark, since according to the latest data we have consumer prices rose 0.1% in the week to 9 November, bringing to an end a period of just over three months without inflation. Looking into the future price growth may be further spurred by an influx of budget spending in the fourth quarter, as well as by a planned 30% increase in pensions which is due to come into effect on 1 December.br /br /In fact, despite the fact that inflationary pressures have been easing in Russia in recent months, chiefly due to collapsing consumer demand and outlfows of capital following the crisis that hit the country a year ago, the official outlook for Russia's inflation in January 2010 is only that it will  be "significantly below "the level of January 2009. This kind of argument is hardly reasssuring, since inflation last January was at an annual rate of 13.4%, although the short term outlook  is for only a mild acceleration, with consumer prices increasing by between 0.2% and 0.3% in November and by about the same amount in December.br /br /strongWhy Not Devalue?/strongbr /br /Well, one way not to solve the problem, according to European Bank for Reconstruction and Development Chief Economist Erik Berglof, would be a ruble devaluation, since despite recognising that the country has a very difficult couple of years in front of it, Berglof argued recently that “this (devaluation) is the wrong way to think about the recovery in Russia”.br /br /As he said, Russia’s failure to wean itself off its reliance on commodity exports has condemned the country struggling to find economic growth in the face of a large drop in demand for its key export products. “If you want to have a flexible exchange rate, you need to get out of this dependence on commodities,” Berglof said. “It’s a major concern that in the last 10 years Russia has become actually more dependent on commodities. Unfortunately, not much progress has been made.”br /br /Well, this is exactly the point, and is why I have been arguing over the last two year about how a href="http://russiatooat.blogspot.com/2007/12/inflation-in-russia-two-much-money.html"all those wage increases which the Russian administration seemed to rejoice in/a (since they bought short term popularity, and fuelled consumption) simply stoked-up the domestic inflation bonfire and in the process did untold damage to domestic competitiveness. However it is evident Russia's industries cannot now simply be transformed overnight, and this is where I find a weakness in Berglofs argument, since some remedy is needed to straighten out the distortions and get of commodity export dependence. But what? If it isn't devaluation, then surely we will need to see very substantial wage deflation in order to attract the now much needed inward foreign investment. The current position whereby prices rise by an annual 10%, and living standards are maintained by a sharp rise in the value of the ruble (making imports cheaper) is quite simply unsustainable, for reasons which should be evident from looking at the chart below. If you look at the green line (which shows the Real trade weighted Effective Exchange Rate) we will see how this has risen sharply since 2003, with the exception of the drop in the value of the ruble in the second half of last year. If we then look at the blue line (which shows the non oil and gas current account balance) we will see how this has been steadily deteriorating (again with the exception of the short sharp shock occassioned by the crisis of last autumn). However, as we can also see, the green (REER) line has now once more resumed its upwards march - the consequence of all those financial inflows, and the associated rise in the ruble - and with the upward march comes the ongoing structural damage to the economy, precisely the can't of structural damage which Erik Berglof would like to avoid, and even unwind.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/Sw54z7eJgNI/AAAAAAAAPo4/wLXX1ViodVQ/s1600/Russia+REER.png"img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 347px;" src="http://1.bp.blogspot.com/_ngczZkrw340/Sw54z7eJgNI/AAAAAAAAPo4/wLXX1ViodVQ/s400/Russia+REER.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5408393036051349714" //a br /br /Of course not everyone agrees with Berglof, and the Russian Association of Regional Banks, whose 450 members include the Russian units of Barclays and Citigroup, has called for a devaluation of as much as 30 percent. Billionaire Vladimir Potanin, realist and owner of 25 percent of OAO GMK Norilsk Nickel, said in recent interview with the Russian Newspaper Vedomosti that the “interests of the economy” will lead the currency to depreciate in the “mid term,” allowing exporters to cut costs and modernize production.br /br /Nonetheless energy, including oil and natural gas, accounted for 69.1 percent of exports to countries outside the former Soviet Union and the Baltic states during the first seven months of this year, according to the Federal Customs Service, while metals were responsible for another 12%. So the commodities dependency is massive, and this situation can't be turned round easily.br /br /strongGetting Carried Away By Global Liquidity?/strongbr /br /Bank Rossi are also not 100% convinced by the merits of Berglof's reasoning, as witnessed by the fact that they facilitated a 35 percent depreciation in the ruble during the second half of last year (see chart below), and as the collapse in raw material prices and the dramatic change in local credit conditions first pushed Russia's economy into recession the ruble’s trading range was widened to between 26 and 41 against the dollar-euro basket.br //pbr /pHowever, as I keep stressing, the central bank is now locked on the horns of a massive dilemma, since as risk appetite returns, with it comes the enthusiasm for buying the so called "high yield" currencies - like the South African Rand, the Russian ruble and the Hungarian forint. Instruments denominated in all these currencies offer investors substantial returns at the present time thanks to offering some of the highest interest rates among globally traded currencies.br /br /Indeed buying Russian rubles was one of the key recommendations made by Angus Halkett, currency strategist at Deutsche Bank in London, in a research report published back in April, and the market seems to have followed his advice The so-called carry trade works by investors borrowing in currencies with low interest rates and good prospects of continuing depreciation (the USD at the moment, for example) in order to buy higher-yielding assets, in countries with high domestic interest rates and continuing prospects for ongoing appreciation.br /br /In general, engaging in one or other form of the thousand-and-one-varieties carry trade is pretty standard practice during times when returns for real economic activity are low, and central banks hold down rates and supply liquidity. Indeed we may include here the kind of carry practiced by banks in borrowing from the central banks only to then lend - for a small, but very low risk, interest rate commission - to their national government, who at this stage in the business cycle will normally be running a fiscal deficit. So more than funding recovery, the watchword at the moment is very much "carry on carrying".br /br /But for those on the receiving end, the consequences of so much carry are far from innocuous, since the process simply funds all sorts of economic distortions, and far from allowing normal market corrections to occur, it simply amplifies the problem. Things are now becoming very detached from the so called "fundamentals" (whatever those might be in the topsy turvy world in which we now live), since it simply is not plausible that the currency should be rising in this way in a country with nine percent plus consumer price inflation and which badly needs to move away from commodity export dependency. The only conclusion which could be drawn is that the Russian economy now needs massive structural reforms, and on any imaginable scenario in the world in which I live these are simply not going to be implemented.br /br /On the other hand Russia’s central bank may have to accept a stronger ruble next year as rising commodity prices prove too powerful a force for policy makers to counter and as consumer demand plays a bigger role in the bank’s decisions. The authorities “will try to do what they can to smooth the appreciation, but it’s very hard to go against the flow,” said Guillaume Tresca, Paris-based emerging market strategist for Calyon, the investment-banking unit of Credit Agricole. “Capital inflows are massive.”br /br /Policy makers have indicated they will cap the ruble’s gains and Prime Minister Vladimir Putin has said his government won’t allow an excessive appreciation as exporters struggle to tap into a global trade recovery. Even so, efforts to fight the ruble’s advance may prove “unproductive,” the International Monetary Fund warned on Nov. 12, adding that “underlying factors” justify its strength. There is a growing consensus that Russia’s central bank is now close to accepting the inevitable, and will allow the ruble to continue appreciating to help domestic demand and cap inflation. As Clemens Grafe, chief economist at UBS in Moscow puts it, “A higher exchange rate, because it transfers incomes into people’s pockets, could actually be more beneficial,”br /br /strongFiscal Resources Near To Running On Empty?/strongbr /br /br /According to preliminary estimates from the Ministry of Finance, the federal budget deficit totaled 4.0 percent between January and September, slightly below the expected level, in part due to the under execution of budgeted expenditures in the first three quarters of 2009. The federal non-oil deficit (which excludes drawing on oil revenues) amounted to 11.0 percent. This is managable, especially given the comparatively low level of Russian sovereign debt to GDP. However, as the World Bank point out under the likely scenario of a sluggish global recovery and modest growth, Russia will face a tightening budget constraint and need to reduce expenditures and the fiscal deficit over the medium term. Further, funding the planned increase in social expenditures, mainly related to increases in pensions, may well requires spending cuts in other expenditure categories. /pbr /br /pThe Ministry of Finance baseline federal budget estimates with conservative oil assumptions icorporate plans to reduce the federal budget deficit from 8.3 percent of GDP in 2009 to 3 percent in 2012, but the medium term fiscal outlook also indicates an extensive drawdown of Russia's Reserve Fund to finance the deficit. Given the size of the anticipated deficit, the Reserve Fund is likely to be depleted by the end of 2010 and borrowing will be required to offset the gap. Estimates of the Ministry of Finance indicate that the combined external and internal borrowing to cover the fiscal deficit will amount to 1.0 percent of GDP in 2009, 1.6 percent in 2010, 2.5 percent in 2011, and 1.5 percent in 2012. All of this is manageble, but the depletion of the Reserve Fund does mean that if downside risks materialise, and in particular if there are more writedowns in the banking sector needing government support that there is now little in the way of a cushion between managed adjustement and unstable dynamics.br /br /br /strongOutlook – A Hard Road To Travel/strongbr /br /br /If one thing is clear hear it is that attaining a recovery in Russia's economic fortunes at this point is going to be no easy feat, as a href="http://www.bloomberg.com/apps/news?pid=newsarchiveamp;sid=aC8Q3ycECRlw"Trust Investment Bank put it in their latest report/a, October data for the world’s largest energy exporter suggest “an almost complete absence of clear signs of recovery” since industrial output slumped and capital investment fell. October capital investment was still down 17.9 percent while industrial output dropped an annual 11.2 percent in October worse than the September reading. Even unemplyment was up again, at 7.7%, although as the World Bank pointed out, this is the result of the same seasonal factors which lead to the fall in unemployment over the summer. br /br /On the other hand, this is by no means a one way street, since disposable incomes climbed a monthly 6 percent in October and rose 3.9 percent compared with the same period last year, registering their biggest annual jump since September 2008, according to provisional data from the Federal Statistics Service, while wage declines eased with wages falling an annual 4.5 percent, compared with a 4.9 percent annual decline in September. And retail sales, which had previously fallen for nine consecutive months, the longest period of declines on record, suddenly sprang back to life, with October retail sales rose 3.2 percent from September and declined by 8.5 percent on an annual basis as compared with a 9.9 percent drop the month before.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/Sw0ZKg7CYQI/AAAAAAAAPnw/bQRC4SINF3E/s1600/russia+retail+sales.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 242px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408006395968774402" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/Sw0ZKg7CYQI/AAAAAAAAPnw/bQRC4SINF3E/s400/russia+retail+sales.png" //abr /br /Other data also show this mixed picture. Monthly GDP Indicator data from VTB Capital, based on the PMI surveys for the Russian manufacturing and service sectors, continued to show economic contraction on an annual basis in October, butthe rate of decline eased for the fifth consecutive month. The Indicator showed a 0.6% annual contraction, the slowest rate seen suring the current eleven-month period of continuous decline.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/Sw2smUlPK_I/AAAAAAAAPoA/Det1Qvhq7ls/s1600/GDP+indicator+2.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 243px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408168501901732850" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/Sw2smUlPK_I/AAAAAAAAPoA/Det1Qvhq7ls/s400/GDP+indicator+2.png" //abr /br /The seasonally adjusted Total Activity Index remained above the no-change mark of 50.0 for the third month running in October, indicating growth of private sector output. The Index improved fractionally over September, to 54.2, indicating reasonably robust growth (although it remained below its historic trend of 56.6). This was driven by a faster rise in services activity, while the rate of growth in manufacturing production slowed to a weaker pace. On a quarterly basis the indicator showed 0.4% q-o-q growth for the second month running.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/Sw2qzRN1UlI/AAAAAAAAPn4/h6pCnqcA1nI/s1600/GDP+Indicator+One.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 242px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408166525313307218" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/Sw2qzRN1UlI/AAAAAAAAPn4/h6pCnqcA1nI/s400/GDP+Indicator+One.png" //abr /br /blockquoteCommenting on the survey, Aleksandra Evtifyeva, Senior Economist at VTB Capital, reported:br /br /““The GDP Indicator continued to point to an improvement in economic activity in October. The manufacturing sector’s performance deteriorated slightly while activity in the services sector is approaching pre-crisis levels. This might be one of the consequences of higher oil prices and a stronger rouble as low export orders were the main drag on manufacturing. Another encouraging development highlighted by the October surveys was the deceleration in the pace of job cuts: the employment sub-indices now stand at around 47, which is already higher than last autumn./blockquotebr /The GDP indicator reading was based on manufacturing sector survey findings which confirmed that overall Russian manufacturing business conditions deteriorated in October. Although output, new orders and input purchases all continued to grow, the rates of expansion slowed compared to September. Moreover, manufacturers shed jobs at a faster pace than in September.br /br /The headline seasonally adjusted Russian Manufacturing PMI fell from 52.0 in September to 49.6 in October, signalling an overall deterioration in the business climate at the start of the fourth quarter. It was the first month-on-month fall in the headline index since it plummeted to a record low (33.8) in December 2008, although the latest figure was indicative of only a marginal rate of decline. Of particular note, the new export orders index posted a strongish decline to 47.8, evidently reflecting the recent ruble appreciation. The input price index continued to point to strong rise in costs associated with metals, energy and oil-related items while output prices index pointed to a moderating growth in price charged.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/Sw2xWi1TESI/AAAAAAAAPoI/50mTeapNq4s/s1600/russia.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 244px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408173728407425314" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Sw2xWi1TESI/AAAAAAAAPoI/50mTeapNq4s/s400/russia.png" //abr /br /In contrast the rebound in Russian services activity rose continued in October, supported by a record fall in charges, and Russia's services sector, which accounts for about 40 percent of the economy, rose for the third consecutive month, reaching its highest level since September 2008, although the reading of 54.3 still remained significantly below the long-run series average.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/Sw2yMDZ9MQI/AAAAAAAAPoQ/ZbQ0hewWC1Y/s1600/russia.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 243px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408174647684182274" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Sw2yMDZ9MQI/AAAAAAAAPoQ/ZbQ0hewWC1Y/s400/russia.png" //abr /br /br /strongSo Where Do We Go From Here?/strongbr /br /In contrast to the most recent PMI data and the opinions of analysts like Neil Shearing at Capital Economics and Trust Investment Bank , Russia's political leaders are markedly more optimistic. Russia’s economy may expand as much as 4 percent in the last quarter of 2009 following a timid return to growth in the third quarter, according to Deputy Economy Minister Andrei Klepach speaking at a conference in Moscow recently. The economy may show “quite strong growth” of between 3 percent and 4 percent in the fourth quarter over the previous three months, Klepach said. This is an interesting claim, and doubly so given that Klepach has been quite cautious so far this year in his claims. However, as Neil Shearing at Capital Economics points out Klepach’s claim that growth could rise to an annual  4%  at some point is perhaps not as wild as it first sounds. Shearing estimates that  output fell by over 9% between Q4 2008 and  Q1 2009, which means that given the sizeable base effects which will exist the Q1 2010 year on year growth rate might well  look look quite impressive.br /br /But this may be a kind of "mirage effect" since if the global recovery slows towards mid-2010 (and with it the level of energy prices) then Russian annual growth could easily fall back sharply over the second half of next year and into 2011. Thus the prospect of a renewed fall in energy prices would imply that the risk a double-dip recession in Russia is quite a real one. br /br /But this is all for the future, while here in the present the rising price of oil and the return of some financial flows into Russia continues to fire-up optimism, as do the numbers for retail sales, so we had better just grit our teeth and hope they don't also fire up the inflation process again, although with lending to households still stuck in gridlock, perhaps the dangers here should not be overstated. More worryingly, inflation may fail to fall significantly from its current high level, even as the central bank reduces interest rates in a bid to stem the ruble rise.br /br /Klepach's optimism is not shared, however, by the World Bank who in their latest report argue Russia’s economy will suffer a deeper contraction than they previously estimated this year even after a series of central bank interest rate cuts which have manifestly failed to ease the “prolonged” credit drought. The World Bank now expect the Russian economy to contract by 8.7 percent this year, compared with their June forecast for a 7.9 percent decline. The government is currently predicting the economy will shrink 8.5 percent this year and grow 1.6 percent next year.br /br /br /blockquote“We expect that the central bank will continue lowering its policy rate in the near future to facilitate credit to the real sector,” the World Bank said. “The impact, however, appears to be limited. The policy rates are mostly indicative, while the cost of credit remains very high.”/blockquoteThe OECD, on the other hand, seems rather more positive, arguing that Russia’s economy will enjoy a stronger commodity-driven rebound than first estimated, although, they hasten to add, authorities should avoid a sudden removal of stimulus measures to ensure the domestic economy keeps up the pace of its advance. They now expect the Russian economy to expand by 4.9 percent in 2010, compared with a June forecast for 3.7 percent growth, although output is still expected to contract 8.7 percent this year (broadly in line with the World Bank), more than the 6.8 percent estimated in June. The 2010 figure seems very optimistic in the light of the problems here identified, and more than adding to our appreciation of the Russian situation such numbers may rather cast doubt on the methodology being applied, and raise questions about some of the numbers being seen for other countries.br /br /br /blockquote“Although recovery is in prospect, the large output gap and subdued inflation suggest that policy stimulus should not be removed too hastily,” the OECD said. “Fiscal policy should be managed to avoid dislocative demand effects from a surge of expenditures in late 2009 followed by a tightening in 2010.” /blockquotebr /According to the OECD, Russia’s economy will enjoy a stronger commodity-driven rebound than first estimated and “Fiscal and monetary stimulus and the recovery of global demand should result in a strong rebound of output towards the end of 2009". The basic OECD argument is that “A large part of the policy stimulus will be felt only late in the year, as fiscal expenditure is back-loaded and a series of interest rate cuts began only in the second quarter.”br /br /strongLong Term Impact On Russian Growth/strongbr /br /But let us not underestimate the difficulties. According to the World Bank Russia’s real GDP will likely return to pre-crisis levels only in late 2012. And, the Bank says, without a more productive, diversified, and competitive economic base, its long-term growth is likely to be slower than in the past decade and than the pre-crisis expectationbr /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/Sw21w05Cq4I/AAAAAAAAPoY/BxotSEDWSOI/s1600/Russia+Trend+Growth.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 213px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408178577978076034" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Sw21w05Cq4I/AAAAAAAAPoY/BxotSEDWSOI/s400/Russia+Trend+Growth.png" //abr /br /Russia’s pre-crisis decade of prosperity was built on strong capital inflows, rising consumer and corporate credit, and significant capital investment. The post-crisis world will look very different: Russia will need to implement fiscal adjustment and diversify its economy in the context of sluggish global growth, low capital flows, and more limited access to foreign financing. So it is now time to look towards a new growth model based on increases in productivity and know-how and on more efficient allocation and use of investment, labor, and FDI. Next generation reforms should be geared to make Russia's monetary policy instruments much more effective, the Russian economy much more productive, diversified, and open—and more able to respond to future shocks. The success and duration of the transition from the current model of heavy dependence of natural resources to a more sustainable growth model depends, according to the World Bank on maintaining a competitive exchange rate, sustaining a prudent fiscal stance, improving the investment climate, more mobile capital and labor, making the financial sector deeper and more efficient, investing in infrastructure to eliminate key bottlenecks to growth, and strengthening governance and fighting corruption as part of the overall effort to improve the effectiveness of the public sector.br /br /The OECD more or less agrees: “Laying the foundations for sustained rapid growth will require unwinding some of the distortive consequences of the crisis". And, may I add, unwinding some of the distortive processes which lead the crisis to be such a severe one in the first place might not be such a bad idea either.div class="blogger-post-footer"img width='1' height='1' src='https://blogger.googleusercontent.com/tracker/1443720106009957151-4988805055748787424?l=easterneuropeeconomy.blogspot.com' alt='' //div]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/are-russias-consumers-getting-carried-away-with-themselves-2/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Video: Radio Free Europe and the Velvet Revolution</title>
		<link>http://www.straightstocks.com/investing-lessons/video-radio-free-europe-and-the-velvet-revolution/</link>
		<comments>http://www.straightstocks.com/investing-lessons/video-radio-free-europe-and-the-velvet-revolution/#comments</comments>
		<pubDate>Mon, 23 Nov 2009 20:52:29 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.22252</guid>
		<description><![CDATA[
         
        
    ]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/video-radio-free-europe-and-the-velvet-revolution/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>The Iron (Pipeline) Curtain</title>
		<link>http://www.straightstocks.com/investing-lessons/the-iron-pipeline-curtain/</link>
		<comments>http://www.straightstocks.com/investing-lessons/the-iron-pipeline-curtain/#comments</comments>
		<pubDate>Fri, 20 Nov 2009 13:32:01 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[adviser]]></category>
		<category><![CDATA[Centre for European Reform]]></category>
		<category><![CDATA[Charles Grant]]></category>
		<category><![CDATA[Commission of European Communities;]]></category>
		<category><![CDATA[E.On]]></category>
		<category><![CDATA[energy]]></category>
		<category><![CDATA[gas dispute;]]></category>
		<category><![CDATA[gas supplies]]></category>
		<category><![CDATA[Gazprom]]></category>
		<category><![CDATA[Ukraine]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.22236</guid>
		<description><![CDATA[Stephen Fidler at the Wall Street Journal has an interesting piece running today about the annual winter pipeline politics (though the sensible agreement yesterday in Yalta may diminish a lot of fears).&#160; There are some interesting facts and numbers in...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/the-iron-pipeline-curtain/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Rogozin vs. Sikorski</title>
		<link>http://www.straightstocks.com/investing-lessons/rogozin-vs-sikorski/</link>
		<comments>http://www.straightstocks.com/investing-lessons/rogozin-vs-sikorski/#comments</comments>
		<pubDate>Tue, 17 Nov 2009 22:33:58 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Alexander Nevsky Orthodox Church]]></category>
		<category><![CDATA[Berlin]]></category>
		<category><![CDATA[Dmitry Rogozin;]]></category>
		<category><![CDATA[North Atlantic Treaty Organization]]></category>
		<category><![CDATA[Opposition Movement of the Future]]></category>
		<category><![CDATA[Orthodox Catholic Church;]]></category>
		<category><![CDATA[Poland]]></category>
		<category><![CDATA[Polish FM]]></category>
		<category><![CDATA[this Berlin Wall anniversary]]></category>
		<category><![CDATA[Warsaw]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.22191</guid>
		<description><![CDATA[A while back we pointed to the Twitter feed of Russia's Amb. to NATO Dmitry Rogozin.&#160; Today it looks like he has launched a personal assault on Radoslav Sikorski, the Polish MFA (everybody is just so prickly around this Berlin...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/rogozin-vs-sikorski/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Vaclav Havel Warns about Russia&#8217;s Democratic Façade</title>
		<link>http://www.straightstocks.com/investing-lessons/vaclav-havel-warns-about-russias-democratic-facade/</link>
		<comments>http://www.straightstocks.com/investing-lessons/vaclav-havel-warns-about-russias-democratic-facade/#comments</comments>
		<pubDate>Tue, 17 Nov 2009 21:47:44 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Russian Government]]></category>
		<category><![CDATA[the anniversary of the Velvet Revolution]]></category>
		<category><![CDATA[totalitarian systems]]></category>
		<category><![CDATA[Vaclav Havel Warns]]></category>
		<category><![CDATA[Vaclav Havel;]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.22189</guid>
		<description><![CDATA[We could've guessed from the letter he signed earlier this year that the Czech luminary/dissident Vaclav Havel was not done talking about the authoritarian drift in Russia.&#160; The Telegraph reports on his speech before a rally commemorating the anniversary of...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/vaclav-havel-warns-about-russias-democratic-facade/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>The Gas Comics: EU Sells Out Human Rights to Turkmenistan</title>
		<link>http://www.straightstocks.com/investing-lessons/the-gas-comics-eu-sells-out-human-rights-to-turkmenistan/</link>
		<comments>http://www.straightstocks.com/investing-lessons/the-gas-comics-eu-sells-out-human-rights-to-turkmenistan/#comments</comments>
		<pubDate>Tue, 17 Nov 2009 19:10:51 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Asia]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Caspian Sea]]></category>
		<category><![CDATA[Commission of European Communities;]]></category>
		<category><![CDATA[diplomat]]></category>
		<category><![CDATA[energy]]></category>
		<category><![CDATA[energy diplomacy]]></category>
		<category><![CDATA[energy grid]]></category>
		<category><![CDATA[energy reliance]]></category>
		<category><![CDATA[Energy Security]]></category>
		<category><![CDATA[European Union]]></category>
		<category><![CDATA[Steve Mann]]></category>
		<category><![CDATA[Turkmenistan]]></category>
		<category><![CDATA[Ukraine]]></category>
		<category><![CDATA[United States]]></category>
		<category><![CDATA[unreliable supplier]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.22186</guid>
		<description><![CDATA[ You've got to respect Global Witness ... for a watchdog NGO, they bring a lot of creativity and innovation to their cause (see this past campaign for another example).&#160; GW has also done a tremendous job in the past...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/the-gas-comics-eu-sells-out-human-rights-to-turkmenistan/feed/</wfw:commentRss>
		<slash:comments>1</slash:comments>
		</item>
		<item>
		<title>The week ahead</title>
		<link>http://www.straightstocks.com/investing-lessons/the-week-ahead-3/</link>
		<comments>http://www.straightstocks.com/investing-lessons/the-week-ahead-3/#comments</comments>
		<pubDate>Sat, 14 Nov 2009 05:16:00 +0000</pubDate>
		<dc:creator>Prieur du Plessis</dc:creator>
				<category><![CDATA[Asia]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Market Commentary]]></category>
		<category><![CDATA[Airline]]></category>
		<category><![CDATA[Bank Of Japan]]></category>
		<category><![CDATA[Barack Obama]]></category>
		<category><![CDATA[Burberry]]></category>
		<category><![CDATA[China]]></category>
		<category><![CDATA[Federal Reserve System]]></category>
		<category><![CDATA[France]]></category>
		<category><![CDATA[Home-Depot]]></category>
		<category><![CDATA[investment postcards]]></category>
		<category><![CDATA[Japan]]></category>
		<category><![CDATA[luxury-goods group]]></category>
		<category><![CDATA[president]]></category>
		<category><![CDATA[report  Airbus owner]]></category>
		<category><![CDATA[Retail Sales]]></category>
		<category><![CDATA[target]]></category>
		<category><![CDATA[United Kingdom]]></category>
		<category><![CDATA[United States]]></category>

		<guid isPermaLink="false">http://www.investmentpostcards.com/?p=13645</guid>
		<description><![CDATA[The video clips in this post provide a handy summary of the reports expected on the economic, financial and corporate front around the globe during the week ahead.]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/the-week-ahead-3/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Tracking the shifting power dynamic in the Eurasia landmass</title>
		<link>http://www.straightstocks.com/investing-lessons/tracking-the-shifting-power-dynamic-in-the-eurasia-landmass/</link>
		<comments>http://www.straightstocks.com/investing-lessons/tracking-the-shifting-power-dynamic-in-the-eurasia-landmass/#comments</comments>
		<pubDate>Thu, 12 Nov 2009 08:37:09 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Asia]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.22129</guid>
		<description><![CDATA[Dmitri Trenin, Director of the Carnegie Moscow Center, dissects Russia's foreign policy in the November/December issue of Foreign Affairs in an article entitled, "Russia Reborn." Following is the passage I think resonates the most. I'm going to keep my lead-in...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/tracking-the-shifting-power-dynamic-in-the-eurasia-landmass/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>On Russia&#8217;s &#8220;charm offensive&#8221; toward foreign investors</title>
		<link>http://www.straightstocks.com/investing-lessons/on-russias-charm-offensive-toward-foreign-investors/</link>
		<comments>http://www.straightstocks.com/investing-lessons/on-russias-charm-offensive-toward-foreign-investors/#comments</comments>
		<pubDate>Wed, 11 Nov 2009 18:35:13 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.22124</guid>
		<description><![CDATA[Translated from a Russian stock market report in yesterday's Frankfurter Allgemeine Zeitung: Analysts from the investment bank Troika Dialog therefore consider the increasing strength of the American economy as a threat to above-average development of the Russian stock markets, which...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/on-russias-charm-offensive-toward-foreign-investors/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>More reflections on the 20th anniversary of the Berlin Wall falling</title>
		<link>http://www.straightstocks.com/investing-lessons/more-reflections-on-the-20th-anniversary-of-the-berlin-wall-falling/</link>
		<comments>http://www.straightstocks.com/investing-lessons/more-reflections-on-the-20th-anniversary-of-the-berlin-wall-falling/#comments</comments>
		<pubDate>Tue, 10 Nov 2009 17:42:42 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Asia]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Afghanistan]]></category>
		<category><![CDATA[Berlin]]></category>
		<category><![CDATA[China]]></category>
		<category><![CDATA[Cuba]]></category>
		<category><![CDATA[Eastern Europe]]></category>
		<category><![CDATA[Laos;]]></category>
		<category><![CDATA[North Korea]]></category>
		<category><![CDATA[president]]></category>
		<category><![CDATA[United States]]></category>
		<category><![CDATA[Vietnam]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.22101</guid>
		<description><![CDATA[One of my favorite blogs, Business Monitor International's Risk Watchdog, had a post yesterday discussing the wider historical context of the Berlin Wall's fall. The discussion of the persistence of Communism and the comparison between 1979 and 1989 I personally...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/more-reflections-on-the-20th-anniversary-of-the-berlin-wall-falling/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Lessons of the fall of the Berlin Wall for the modern day</title>
		<link>http://www.straightstocks.com/investing-lessons/lessons-of-the-fall-of-the-berlin-wall-for-the-modern-day/</link>
		<comments>http://www.straightstocks.com/investing-lessons/lessons-of-the-fall-of-the-berlin-wall-for-the-modern-day/#comments</comments>
		<pubDate>Mon, 09 Nov 2009 17:28:22 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Asia]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Berlin]]></category>
		<category><![CDATA[David Satter]]></category>
		<category><![CDATA[Hudson Institute]]></category>
		<category><![CDATA[Soviet Union]]></category>
		<category><![CDATA[the 20th anniversary of the fall of the Berlin Wall]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.22081</guid>
		<description><![CDATA["History does not repeat itself, but it does rhyme." - Mark Twain David Satter, Senior Fellow at the Hudson Institute and visiting scholar at SAIS, has done an amazing thing to mark the 20th anniversary of the fall of the...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/lessons-of-the-fall-of-the-berlin-wall-for-the-modern-day/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Assessing the nexus of Russia&#8217;s economic crisis and US-Russia relations</title>
		<link>http://www.straightstocks.com/investing-lessons/assessing-the-nexus-of-russias-economic-crisis-and-us-russia-relations/</link>
		<comments>http://www.straightstocks.com/investing-lessons/assessing-the-nexus-of-russias-economic-crisis-and-us-russia-relations/#comments</comments>
		<pubDate>Thu, 05 Nov 2009 19:44:17 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Asia]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.22053</guid>
		<description><![CDATA[Ariel Cohen and Richard Ericson have a new paper discussing Russia's economic crisis and its relations with the United States. I would encourage reading this paper in full as it hits on all the major factors relevant to Russia's economic...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/assessing-the-nexus-of-russias-economic-crisis-and-us-russia-relations/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Magna Reflections</title>
		<link>http://www.straightstocks.com/investing-lessons/magna-reflections/</link>
		<comments>http://www.straightstocks.com/investing-lessons/magna-reflections/#comments</comments>
		<pubDate>Thu, 05 Nov 2009 07:36:02 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.22035</guid>
		<description><![CDATA[I gave a talk at a conference today and we released the white paper on Singapore so frankly I'm getting to this later than it would normally take to respond. I believe Magna is one of those cases I have...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/magna-reflections/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Miliband in Moscow and the need to link Russia-UK relations with human rights</title>
		<link>http://www.straightstocks.com/investing-lessons/miliband-in-moscow-and-the-need-to-link-russia-uk-relations-with-human-rights/</link>
		<comments>http://www.straightstocks.com/investing-lessons/miliband-in-moscow-and-the-need-to-link-russia-uk-relations-with-human-rights/#comments</comments>
		<pubDate>Mon, 02 Nov 2009 22:53:34 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Alexander Litvinenko]]></category>
		<category><![CDATA[Andrei Lugovoi]]></category>
		<category><![CDATA[BBC]]></category>
		<category><![CDATA[David Miliband]]></category>
		<category><![CDATA[Foreign Minister]]></category>
		<category><![CDATA[Foreign Secretary]]></category>
		<category><![CDATA[law forbidding extradition]]></category>
		<category><![CDATA[London]]></category>
		<category><![CDATA[London hospital]]></category>
		<category><![CDATA[Mikhail Khodorkovsky]]></category>
		<category><![CDATA[Moscow]]></category>
		<category><![CDATA[poisoning]]></category>
		<category><![CDATA[Sergey Lavrov]]></category>
		<category><![CDATA[the Guardian]]></category>
		<category><![CDATA[The Times
 of London;]]></category>
		<category><![CDATA[the Times]]></category>
		<category><![CDATA[thorough online video coverage]]></category>
		<category><![CDATA[United Kingdom]]></category>
		<category><![CDATA[Washington]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.21998</guid>
		<description><![CDATA[Bob has an opinion article in today's edition of the Guardian stressing the importance of linking human rights with foreign relations during David Miliband's visit to Russia this week, and elsewhere in the same paper, Mikhail Khodorkovsky's mother has issued...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/miliband-in-moscow-and-the-need-to-link-russia-uk-relations-with-human-rights/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Tonight in Leipzig, Khodorkovsky Charity Concert</title>
		<link>http://www.straightstocks.com/investing-lessons/tonight-in-leipzig-khodorkovsky-charity-concert/</link>
		<comments>http://www.straightstocks.com/investing-lessons/tonight-in-leipzig-khodorkovsky-charity-concert/#comments</comments>
		<pubDate>Thu, 29 Oct 2009 13:48:07 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.21957</guid>
		<description><![CDATA[Tonight in Leipzig, Germany, Gidon Kremer and the Kremerata Baltica under conductor Roman Kofman will perform the German premiere of Arvo Pärt's "4th Symphony" in dedication to Mikhail Khodorkovsky, as well as the "Silent Prayer" by Giya Kancheli.All proceeds from...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/tonight-in-leipzig-khodorkovsky-charity-concert/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Grigory Pasko: I live to this day as well&#8230;</title>
		<link>http://www.straightstocks.com/investing-lessons/grigory-pasko-i-live-to-this-day-as-well/</link>
		<comments>http://www.straightstocks.com/investing-lessons/grigory-pasko-i-live-to-this-day-as-well/#comments</comments>
		<pubDate>Fri, 23 Oct 2009 11:35:10 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Amnesty International]]></category>
		<category><![CDATA[concrete law]]></category>
		<category><![CDATA[Council of Europe]]></category>
		<category><![CDATA[European Parliament]]></category>
		<category><![CDATA[Human Rights Watch]]></category>
		<category><![CDATA[idiocy]]></category>
		<category><![CDATA[Journalist]]></category>
		<category><![CDATA[KGB]]></category>
		<category><![CDATA[mass information media]]></category>
		<category><![CDATA[military journalist]]></category>
		<category><![CDATA[military mass information media]]></category>
		<category><![CDATA[minister of defense]]></category>
		<category><![CDATA[officer]]></category>
		<category><![CDATA[Parliamentary Assembly]]></category>
		<category><![CDATA[Strasbourg Court;]]></category>
		<category><![CDATA[Supreme Court]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.21886</guid>
		<description><![CDATA[ I live to this day as well... Grigory Pasko, journalist Instead of an epigraph: «Endpiece of a modern fairytale: «And had the not been rehabilitated, they live to this day as well» -- Jerzy Lec Если Вы хотите прочитать...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/grigory-pasko-i-live-to-this-day-as-well/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>MBK Responds to Medvedev: Generation M</title>
		<link>http://www.straightstocks.com/investing-lessons/mbk-responds-to-medvedev-generation-m/</link>
		<comments>http://www.straightstocks.com/investing-lessons/mbk-responds-to-medvedev-generation-m/#comments</comments>
		<pubDate>Wed, 21 Oct 2009 17:37:37 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.21855</guid>
		<description><![CDATA[The following is a translation of the MBK's opinion editorial as published today in Vedomosti (original is here). GENERATION M Many of my comrades consider that it is senseless to comment on president Dmitry Medvedev's famous article "Russia, forward!", and...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/mbk-responds-to-medvedev-generation-m/feed/</wfw:commentRss>
		<slash:comments>1</slash:comments>
		</item>
		<item>
		<title>Russia&#8217;s Pivotal Role in Napoleonic Europe</title>
		<link>http://www.straightstocks.com/investing-lessons/russias-pivotal-role-in-napoleonic-europe/</link>
		<comments>http://www.straightstocks.com/investing-lessons/russias-pivotal-role-in-napoleonic-europe/#comments</comments>
		<pubDate>Thu, 15 Oct 2009 14:28:10 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.21782</guid>
		<description><![CDATA[A new book has been published about a very interesting period in continental history - Russia's confrontation with Napoleon in 1812, just one of the many conflicts with Western Europe over the past few centuries which continues to have its...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/russias-pivotal-role-in-napoleonic-europe/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>The Pipeline Weapon</title>
		<link>http://www.straightstocks.com/investing-lessons/the-pipeline-weapon/</link>
		<comments>http://www.straightstocks.com/investing-lessons/the-pipeline-weapon/#comments</comments>
		<pubDate>Tue, 13 Oct 2009 20:54:31 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[coercive energy policy]]></category>
		<category><![CDATA[energy]]></category>
		<category><![CDATA[energy corporations;]]></category>
		<category><![CDATA[energy firms]]></category>
		<category><![CDATA[energy lever]]></category>
		<category><![CDATA[Energy Policy]]></category>
		<category><![CDATA[Energy Security]]></category>
		<category><![CDATA[energy supplies]]></category>
		<category><![CDATA[energy tool]]></category>
		<category><![CDATA[energy weapon;]]></category>
		<category><![CDATA[Nord Stream]]></category>
		<category><![CDATA[North-European gas pipeline;]]></category>
		<category><![CDATA[Putin]]></category>
		<category><![CDATA[Swedish Ministry of Defence]]></category>
		<category><![CDATA[the New York Times]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.21758</guid>
		<description><![CDATA[I'm grateful to the commenter John who guided me toward this link for the report sponsored by the Swedish Ministry of Defence on energy security and the North European Gas Pipeline, otherwise known as Nord Stream.&#160; I was a little...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/the-pipeline-weapon/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Gazprom as the Problem Child</title>
		<link>http://www.straightstocks.com/investing-lessons/gazprom-as-the-problem-child/</link>
		<comments>http://www.straightstocks.com/investing-lessons/gazprom-as-the-problem-child/#comments</comments>
		<pubDate>Fri, 02 Oct 2009 18:05:08 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Alexander Ananenkov]]></category>
		<category><![CDATA[chief]]></category>
		<category><![CDATA[chief economist]]></category>
		<category><![CDATA[deputy chief executive]]></category>
		<category><![CDATA[director of gas research]]></category>
		<category><![CDATA[Fatih Birol;]]></category>
		<category><![CDATA[gas research;]]></category>
		<category><![CDATA[Gazprom]]></category>
		<category><![CDATA[international energy agency]]></category>
		<category><![CDATA[Jonathan Stern]]></category>
		<category><![CDATA[Nabucco pipeline;]]></category>
		<category><![CDATA[Natural Gas]]></category>
		<category><![CDATA[nuclear energy]]></category>
		<category><![CDATA[Oxford Institute of Energy Studies]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.21638</guid>
		<description><![CDATA[Miriam Elder has a good one in the FT today about the problems at Gazprom, no doubt worsened by European incoherence:"If the company cuts [its investment] too much, it may be harmful for them if demand surges. They will miss...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/gazprom-as-the-problem-child/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Parag Khanna on the Future of Sovereign Borders</title>
		<link>http://www.straightstocks.com/investing-lessons/parag-khanna-on-the-future-of-sovereign-borders/</link>
		<comments>http://www.straightstocks.com/investing-lessons/parag-khanna-on-the-future-of-sovereign-borders/#comments</comments>
		<pubDate>Thu, 01 Oct 2009 13:41:08 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Asia]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[China]]></category>
		<category><![CDATA[Middle East]]></category>
		<category><![CDATA[Mongolia]]></category>
		<category><![CDATA[Parag Khanna]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.21619</guid>
		<description><![CDATA[If you can find 20 minutes to spare, Parag Khanna's presentation at this year's TED conference has some thought provoking moments. Among them: 2:45 - 6:00 - a discussion of the China-Mongolia-Russia space and how the de facto Chinese influence...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/parag-khanna-on-the-future-of-sovereign-borders/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Westerwellian Foreign Policy</title>
		<link>http://www.straightstocks.com/investing-lessons/westerwellian-foreign-policy/</link>
		<comments>http://www.straightstocks.com/investing-lessons/westerwellian-foreign-policy/#comments</comments>
		<pubDate>Mon, 28 Sep 2009 22:27:01 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Afghanistan]]></category>
		<category><![CDATA[American Council on Germany]]></category>
		<category><![CDATA[Commission of European Communities;]]></category>
		<category><![CDATA[E.On]]></category>
		<category><![CDATA[energy corporations;]]></category>
		<category><![CDATA[EUR]]></category>
		<category><![CDATA[Georgia]]></category>
		<category><![CDATA[Germany]]></category>
		<category><![CDATA[Graham Stack]]></category>
		<category><![CDATA[Guido Westerwelle]]></category>
		<category><![CDATA[Hans-Dietrich Genscher]]></category>
		<category><![CDATA[Islamic Republic of Iran]]></category>
		<category><![CDATA[Magna]]></category>
		<category><![CDATA[North Atlantic Treaty Organization]]></category>
		<category><![CDATA[president]]></category>
		<category><![CDATA[real energy security]]></category>
		<category><![CDATA[Sberbank]]></category>
		<category><![CDATA[Ukraine]]></category>
		<category><![CDATA[William Drozdiak]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.21578</guid>
		<description><![CDATA[With so many changes afoot in Germany following the elections, there is surprising little discussion about how all this is going to affect relations with Russia.&#160; There's a pretty good reason for that, as everyone assumes the likely appointment of...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/westerwellian-foreign-policy/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>The Saudi Lever Over Iran</title>
		<link>http://www.straightstocks.com/investing-lessons/the-saudi-lever-over-iran/</link>
		<comments>http://www.straightstocks.com/investing-lessons/the-saudi-lever-over-iran/#comments</comments>
		<pubDate>Mon, 28 Sep 2009 15:23:02 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Asia]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Islamic Republic of Iran]]></category>
		<category><![CDATA[Oil]]></category>
		<category><![CDATA[oil price collapse]]></category>
		<category><![CDATA[Organization Of Petroleum Exporting Countries]]></category>
		<category><![CDATA[Saudi Arabia]]></category>
		<category><![CDATA[Soviet Union]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.21572</guid>
		<description><![CDATA[Writing in the Australian paper The National, Roger Stern and Bernard Haykel see the current situation in Iran as similar to the twilight of the Soviet Union:Next, the kingdom should reprise its greatest peacemaking performance: the 1986 oil price collapse....]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/the-saudi-lever-over-iran/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>The G20 and Why Export Dependency And Global Imbalances Matter</title>
		<link>http://www.straightstocks.com/investing-lessons/the-g20-and-why-export-dependency-and-global-imbalances-matter/</link>
		<comments>http://www.straightstocks.com/investing-lessons/the-g20-and-why-export-dependency-and-global-imbalances-matter/#comments</comments>
		<pubDate>Sun, 27 Sep 2009 19:26:00 +0000</pubDate>
		<dc:creator>Edward Hugh</dc:creator>
				<category><![CDATA[Economics]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[account]]></category>
		<category><![CDATA[acrimonious debate]]></category>
		<category><![CDATA[added detail]]></category>
		<category><![CDATA[Age]]></category>
		<category><![CDATA[Bo Malmberg]]></category>
		<category><![CDATA[Bulgaria]]></category>
		<category><![CDATA[Chart;]]></category>
		<category><![CDATA[China]]></category>
		<category><![CDATA[Claus Vistesen]]></category>
		<category><![CDATA[Eastern Europe]]></category>
		<category><![CDATA[eastern europe economy watch]]></category>
		<category><![CDATA[Ecuador]]></category>
		<category><![CDATA[excessive risk]]></category>
		<category><![CDATA[France]]></category>
		<category><![CDATA[Franco Modigliani]]></category>
		<category><![CDATA[g20 meeting]]></category>
		<category><![CDATA[german elections]]></category>
		<category><![CDATA[Germany]]></category>
		<category><![CDATA[global savings]]></category>
		<category><![CDATA[Greece]]></category>
		<category><![CDATA[heart of the problem]]></category>
		<category><![CDATA[Iceland]]></category>
		<category><![CDATA[inevitable consequence]]></category>
		<category><![CDATA[Ireland]]></category>
		<category><![CDATA[Japan]]></category>
		<category><![CDATA[Larry Summers;]]></category>
		<category><![CDATA[level]]></category>
		<category><![CDATA[model]]></category>
		<category><![CDATA[Pakistan]]></category>
		<category><![CDATA[population]]></category>
		<category><![CDATA[Portugal]]></category>
		<category><![CDATA[Romania]]></category>
		<category><![CDATA[Spain]]></category>
		<category><![CDATA[Sweden]]></category>
		<category><![CDATA[UK]]></category>
		<category><![CDATA[United Kingdom]]></category>
		<category><![CDATA[United States]]></category>

		<guid isPermaLink="false">tag:blogger.com,1999:blog-1443720106009957151.post-4923926174271559162</guid>
		<description><![CDATA[With the timing of the latest G20 meeting set to coincide with the run-in to the German elections a href="http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100001043/germany-declares-economic-war/"acrimonious debate has not been absent/a, but even as the passions generated by the arrival of voting day subside, it is clear that just beneath the surface their lie some simmering problems which simply will not go away. Despite the fact that nothing is really on the table that will make that much difference in the short run, I think the structural transformation that they are carrying out at G20 level is going to be very important in the longer term in finding eventual solutions.br /br /According a href="http://www.ft.com/cms/s/0/268529ce-a8ec-11de-b8bd-00144feabdc0.html"to Bertrand Benoit in the Financial Times/a the G20: "will endorse a report from the Financial Stability Board that calls for bonuses to be linked to the long-term success of financial companies and not excessive risk taking." Well this of course sounds absolutely fine. I have absolutely no objection, but we need to understand that from a macro economic point of view it is virtually irrelevant, with the added detail that the implications are that a recovery in growth will be slower yet less risky. Evidently the issue of why there has been so much liquidity floating around (and this has been the heart of the problem) has little to do with bank bonuses and salaries.br /br /Having interest rates near zero in a significant part of the developed world for an extended period of time - the inevitable consequence of having such a huge excess in global savings - means the the money will still be there, very cheaply, for people to do just whatever they want with it. They might, for example, a href="http://hungaryeconomywatch.blogspot.com/2009/09/as-hungarys-correction-heads-for-dead.html"like to buy Hungarian forint denominated assets/a, as Deutsche Bank analysts have been advising them to do, and try to find out just how long it takes them to push the economy of that small country right off the edge of the precipice on which it is presently so perilously perched. Or they might like to do a href="http://russiatooat.blogspot.com/2009/08/bank-rossii-eases-further-as-russias.html"something similar with the Russian Ruble/a, and see if they can block Bank Rossii from being able to move towards a floating currency. Or, if they are really short of interesting ideas, a href="http://southafricaeconomywatch.blogspot.com/2009/08/south-africa-recession-continues.html"they might like to buy the South African Rand/a to see just how far out of line you can push the currency in a country which is suffering its worst recession in a couple of decades. Of course, all of this is not that risky for those who understand the finer arts of Forex trading, and the banks who lend them the money will run little risk. The risk here is for the poor people who live in Hungary's and South Africa's of this world. Risk in these cases is, of course, massive.br /br /The banks are also being pressurised to raise their capital ratios. While this is always well-advised in the boom times, it only makes matters worse in a downturn. The current drive to make banks less leveraged and safer may well have the perverse consequence of reducing money balances in the short term. At least this is what Tim Congdon from International Monetary Research argues. This process simply "strengthens the deflationary forces in the world economy, and that increases the risks of a double-dip recession in 2010," he says.br /br /Meanwhile everyone will continue to drive full speed ahead on open ended stimulus programmes, without being altogether clear what it is they are trying to stimulate (see a href="http://spaineconomy.blogspot.com/2009/09/three-million-unsold-properties-in.html"the Spanish case/a if you don't believe me). "The G20 will call for extraordinary fiscal and monetary stimulus to be continued until “a durable recovery is secured”". But, and here comes the rub, it will also call on countries to act together to ensure more balanced economic growth in future, with surplus countries – China, Germany, Japan and oil exporters – urged to raise domestic demand and deficit countries asked to reduce budget and trade deficits once the world has secured a recovery.br /br /This is evidently the sensitive point which has had everyone from Peer Steinbrück and Angela Merkel, to the newly elected members of the DJP in Japan and the governing elite in China twitching away furiously in recent days. The leaders of these countries have become nervous, since they feel they are being blamed for something they haven't done, and naturally they are lashing back.br /br /They need not worry so much, these exhortations will also be to no real avail. In order to see why, let's take a quick tour through the real heart of the problem.br /br /strongWho Runs The Current Account Deficitsbr //strongbr /According to the current director of the US president’s National Economic Council, Larry Summers, writing in an academic paper published in 1990, the United States economy was set to run current account deficits for a period of 15 years, with the consequence that more than 6 percent of U.S. assets would be owned by foreigners by 2010. However, as he saw it, high saving during the subsequent 15 years would result in the generation of current account surpluses and a reduction in foreign capital ownership to 3.5 percent. After 2025, or so the analysis ran, the rapid increase in the number of elderly, would once again lead the United States to run current account deficits.br /br /Since this forecast seems to come so near to describing a process we are now seeing unfolding before our very eyes – in a world where many hold economists can see nothing at all coming – we might like to ask ourselves how anyone could have known so much so far in advance? The answer to this strange questioin is Larry Summers used a very simple model to arrive at his “predictions”, a model based on the life cycle saving and borrowing mechanism, the description of which was to lead Italian economist Franco Modigliani to win a Nobel in 1995. Summers and his co-authors simply applied the individual Life Cycle model to a whole population, and as it appears came up with a fairly plausible outcome.br /br /Everyone is evidently only too well aware that all developed societies are ageing (some, of course, more rapidly than others), but what many observers do not seem to grasp is that this ageing process has very concrete and forseeable economic consequences, consequences which have now been captured in a whole generation of economic models, and which are described in the accompanying chart prepared by my colleague Claus Vistesen.br /br /br /pa href="http://4.bp.blogspot.com/_ngczZkrw340/Sr0kieQL3jI/AAAAAAAAPQg/aWfz1vbb4os/s1600-h/Ageing+and+the+Current+Account.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 209px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5385500904060083762" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/Sr0kieQL3jI/AAAAAAAAPQg/aWfz1vbb4os/s400/Ageing+and+the+Current+Account.png" //abr /br /As can be seen from the chart, as the demographic transition – identified in age bands following the nomenclature of the Swedish demographer Bo Malmberg - advances median population ages move steadily upwards, producing in their wake a whole series of economic phenomena, phenomena which tend to impact directly on the domestic consumption and the current account balance of a national economy. The thick blue line shows what happens to the current account as a given country moves through the age bands. Initially there is a tendency to sharp deficits and severe economic crises, such as are very characteristic of low income, high fertility, developing economies like Ecuador or Pakistan. Then, as societies develop socially and economically the tendency toward deficit remains, only this time on a more mature, and seemingly more stable, basis as seen most evidently in recent years in countries like the United States, the United Kingdom, Spain and France, who all have population median ages in the 35 to 40 range.br /br /But then something strange happens as population median ages rise past the 40 mark, and especially as they age past 42. The current account suddenly swings into the positive zone, and this can be seen in the real world in countries like Germany, Japan and Sweden, where the ageing population effect means that domestic consumption becomes steadily weaker, and if we look at the second (purple) line in the chart, which illustrates the level of export dependency, we can see that while this is weak at the lower median age ranges (due to the momentum derived from stronger domestic-credit boom dynamics), it steadily grows at the higher median ages.br /br /So, is there any empirical evidence for this phenomenon you may ask? Well just look at Germany, Japan and Sweden, and how the recent collapse in demand for their exports produced by the global crisis sent the economies in these countries spiralling downwards. On the other hand, during periods of economic boom, strong surplus countries need to find an outlet for the savings they accumulate. Hence the large current account deficit countries in the East of Europe, for example, were funded by Austrian, Swedish and German banks. The question we should be asking is not why banks in these countries were so stupid as to lose so much money, rather it is why they had so much money to lose in the first place. That is, why were their populations saving so much, and why were profitable domestic outlets for such savings insufficient? Once we can get hold of this, we can start to see one of the reasons why there have been such large global imbalances in the first place.br /br /One of the problematic aspects of this situation, looking at the chart, is there there is no steady state (or cyclical correction) mechanism at work here, since there is not, to use the jargon, homeostatis, and the need to export (the export dependency purple line) simple heads off exponentially towards infinity, while the level of deficit does the same in the opposite direction. The reason that the need to export moves exponentially upwards is that median age doesn’t just move up from one level to another, and sit there, but keeps climbing steadily upwards, and the more it rises, the less “bang for the buck” in GDP growth you get from any given level of exports. This is the situation we are seeing now in Germany and Japan, and this is why they will struggle mightily to pull themselves out of the present recession, and why the whole situation is evidently not sustainable. So, if the countries in question don’t do something, and do something now, to stop median ages rising too rapidly, more crises like the one we are presently living through are evidently guaranteed.br /br /This way of thinking about things is sure to form, in my opinion, one piece in the new, post-crisis, macro mindset that will emerge. Of this I have no doubt, since the present crisis is all about imbalances, and this is one simple and straightforward model for thinking about and understanding them. Basically one group of people - the current account surplus countries (China, Japan, Germany, Sweden) - were afloat with money, and spent their time rather recklessly lending it to another group of people - the current account deficit crowd ( the United States, Iceland, Ireland, the UK, Spain, Portugal, Greece, Romania, Bulgaria, the Baltics, Hungary and New Zealand etc, etc) - who needed to fund their deficit habit, and who did so by equally recklessly borrowing the money. So if you want to understand the banking crisis, you need, as the US economist Brad Setser would say, to follow the money and find source of all those surpluses and deficits.br /br /And all of this helps us understand not only the crisis, but also the problems we are going to have getting out of it, since as Larry Summers noted over lunch with the FT’s Chrystia Freeland “‘The global imbalances have to add up to zero and so, if the US is going to be less the consumer importer of last resort, then other countries are going to need to be in different positions as well.’br /br /As Freeland highlighted, on this possibility, Summers was absolutely bullish, and understandably so. “The very great enthusiasm for accumulating reserves that one saw globally is likely to be a smaller factor over the next decade than it has been in recent years” he predicts this time. And so too is economic growth (going to be a smaller factor over the next decade), Edward Hugh rapidly adds, since with everyone looking to export their way out of trouble, we have to ask, as Nobel Economist Paul Krugman pointed out, the tricky question about just who the customers with the current account deficits are now going to be to enable all those much needed exports. The current talk of a simple and straightforward recovery for the global economy is misleading, and a long hard road lies ahead for all of us.br /br /And the first evidence of this can be found in the latest quarterly US current account data. The deficit narrowed in the second quarter to $98.8 billion, the lowest level since 2001, reflecting a smaller shortfall in trade of goods as imports and exports both decreased. This is far from being a linear process, and the U.S. trade deficit was up again in July, rising 16.3% over June to hit $32.0 billion, according to Commerce Department data. Despite the fact that imports rose sharply in July on the back of the stimulus programme, total trade activity is still well below last year's level, and the trade deficit with China was $20.42 billion compared with $25.01 billion in July 2008.br /br /In addition US bank loans have been falling fast, and were down at an annual pace of almost 14% in the three months to August (from $7,147bn to $6,886bn). The M3 "broad" money supply, watched as an early warning signal of where the economy will be a year or so later, has been falling at a 5% annual rate. There is absolutely no sign of an imminent sharp rebound in US domestic demand, and little likelihood of a continuing strong current account deficit. The most likely path is for the deficit to steadily close of its own accord as the stimulus programem which is still supporting it is steadily withdrawn. Well, this is what the world wanted, and this is what it is now going to get. So everyone should be happy, I guess. /ppAnd while the deficit countries close them down, there is little liklihood of the surplus countries taking their place. It is like telling these countries, you know, you really should have had more children 30 years ago. Do people really think these countries can simply invent policies at the snap of a finger and convince citizens who are worried about the stability of their pension system to spend more now, just because it is in the interest of the global economic system? And what policies exactly. Buy one and get another one for free from the central bank? /ppBut coming back to the G20, as I said at the outset, what I think really matters at this point is that our policymakers have set up a problem for themselves to solve, and they have also set up a structure through which they may solve it. And that is something. Now in all likelihood we will continue to thrash around trying-out false solutions for the next two or three years, but then maybe, just maybe, they will all be ready to talk about what we really might do. And here's the good news, there is another planet out there waiting to be exported to. And the planet has a name - the Emerging Economies. So all we have to do now is work out is a sensible and responsible framework (the so called "supportive environment") through which cheap credit can be channeled into these countries, without that is producing the kind of boom-busts we just saw in the Baltics, Romania and Bulgaria. Not a little task, but not an impossible one either.br /br /br /(1) An Aging Society: Opportunityor Challenge? - written with David M. Cutler (Massachusetts Institute of Technology), James M. Poterba (Massachusetts Institute of Technology), and Loise M. Sheiner (Harvard University) and published in Brookings Papers On Economic Activity, 1990. /pdiv class="blogger-post-footer"img width='1' height='1' src='https://blogger.googleusercontent.com/tracker/1443720106009957151-4923926174271559162?l=easterneuropeeconomy.blogspot.com' alt='' //div]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/the-g20-and-why-export-dependency-and-global-imbalances-matter/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>On Russia, Merkel = Schröder?</title>
		<link>http://www.straightstocks.com/investing-lessons/on-russia-merkel-schroder/</link>
		<comments>http://www.straightstocks.com/investing-lessons/on-russia-merkel-schroder/#comments</comments>
		<pubDate>Fri, 25 Sep 2009 20:48:27 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[architect]]></category>
		<category><![CDATA[architect of Schröder's pro-Russian foreign policy]]></category>
		<category><![CDATA[Baltic states]]></category>
		<category><![CDATA[Chancellor]]></category>
		<category><![CDATA[chief of staff]]></category>
		<category><![CDATA[Foreign Minister]]></category>
		<category><![CDATA[Franz-Walter Steinmeier]]></category>
		<category><![CDATA[Germany]]></category>
		<category><![CDATA[Warsaw]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.21563</guid>
		<description><![CDATA[A very interesting if not controversial article from Luke Harding makes the argument that we are seeing continuity in foreign policy toward Russia under both Gerhard Schröder and Angela Merkel.&#160; In my experience, the change has been night and day...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/on-russia-merkel-schroder/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>The Russia First Syndrome</title>
		<link>http://www.straightstocks.com/investing-lessons/the-russia-first-syndrome/</link>
		<comments>http://www.straightstocks.com/investing-lessons/the-russia-first-syndrome/#comments</comments>
		<pubDate>Fri, 25 Sep 2009 15:10:02 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.21548</guid>
		<description><![CDATA[Adrian Blomfied at the Independent hits the nail right on the head in explaining how Vladimir Putin and Gazprom have recruited such expensive and powerful cheerleaders in key Western countries - the process Bob often calls disaggregation and co-optation. One...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/the-russia-first-syndrome/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>&#8220;Do Not Awaken the Partisans of Belarus, Mr. Medvedev&#8221;</title>
		<link>http://www.straightstocks.com/investing-lessons/do-not-awaken-the-partisans-of-belarus-mr-medvedev/</link>
		<comments>http://www.straightstocks.com/investing-lessons/do-not-awaken-the-partisans-of-belarus-mr-medvedev/#comments</comments>
		<pubDate>Thu, 24 Sep 2009 21:41:29 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.21539</guid>
		<description><![CDATA[The following is an exclusive translation from Lenta.ru of an article which takes a look at some elements of the opposition in Belarus which is furious over the introduction of Russian troops into the country for training exercises.&#160; Some protests...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/do-not-awaken-the-partisans-of-belarus-mr-medvedev/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Snapshot Observations on the Global Economic Crisis</title>
		<link>http://www.straightstocks.com/investing-lessons/snapshot-observations-on-the-global-economic-crisis/</link>
		<comments>http://www.straightstocks.com/investing-lessons/snapshot-observations-on-the-global-economic-crisis/#comments</comments>
		<pubDate>Tue, 22 Sep 2009 18:59:51 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Asia]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Angela Merkel]]></category>
		<category><![CDATA[Angela Merkel's government;]]></category>
		<category><![CDATA[bank bailout]]></category>
		<category><![CDATA[bank loans]]></category>
		<category><![CDATA[bank of england]]></category>
		<category><![CDATA[Brazil]]></category>
		<category><![CDATA[central bank]]></category>
		<category><![CDATA[Chancellor]]></category>
		<category><![CDATA[China]]></category>
		<category><![CDATA[Cnn]]></category>
		<category><![CDATA[David Goldman;]]></category>
		<category><![CDATA[Economist]]></category>
		<category><![CDATA[Electricity]]></category>
		<category><![CDATA[gas and oil prices]]></category>
		<category><![CDATA[Geir Haarde]]></category>
		<category><![CDATA[Germany]]></category>
		<category><![CDATA[Gordon Brown]]></category>
		<category><![CDATA[guarantee bank assets]]></category>
		<category><![CDATA[Iceland]]></category>
		<category><![CDATA[India]]></category>
		<category><![CDATA[International Monetary Fund]]></category>
		<category><![CDATA[Japan]]></category>
		<category><![CDATA[Luiz Inacio Lula da Silva]]></category>
		<category><![CDATA[Mexican government]]></category>
		<category><![CDATA[Mexico]]></category>
		<category><![CDATA[Natural Gas]]></category>
		<category><![CDATA[Obama administration]]></category>
		<category><![CDATA[Oil]]></category>
		<category><![CDATA[Oil Exports]]></category>
		<category><![CDATA[oil-driven economy]]></category>
		<category><![CDATA[Premier Wen Jiabao's government]]></category>
		<category><![CDATA[president]]></category>
		<category><![CDATA[Prime Minister]]></category>
		<category><![CDATA[Silva's administration]]></category>
		<category><![CDATA[Taro Aso]]></category>
		<category><![CDATA[The Bank of Japan]]></category>
		<category><![CDATA[Time Warner]]></category>
		<category><![CDATA[typical old-media fashion]]></category>
		<category><![CDATA[U .S. Federal Reserve;]]></category>
		<category><![CDATA[United Kingdom]]></category>
		<category><![CDATA[United States]]></category>
		<category><![CDATA[USD]]></category>
		<category><![CDATA[Wen Jiabao]]></category>
		<category><![CDATA[wide scale insurance program]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.21494</guid>
		<description><![CDATA[CNN Money is running an interesting feature by David Goldman entitled "10 countries, 10 solutions" which details the particularities of the global economic crisis facing 10 key countries. In typical old-media fashion, the layout makes no sense from a user-friendliness...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/snapshot-observations-on-the-global-economic-crisis/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Russia to NATO: No, Really, After You. I Insist.</title>
		<link>http://www.straightstocks.com/investing-lessons/russia-to-nato-no-really-after-you-i-insist/</link>
		<comments>http://www.straightstocks.com/investing-lessons/russia-to-nato-no-really-after-you-i-insist/#comments</comments>
		<pubDate>Tue, 22 Sep 2009 17:52:51 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Andrei Nesterenko;]]></category>
		<category><![CDATA[North Atlantic Treaty Organization]]></category>
		<category><![CDATA[Russian Foreign Ministry;]]></category>
		<category><![CDATA[spokesman]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.21491</guid>
		<description><![CDATA[Honestly, is there any other way to interpret this? Russian Foreign Ministry spokesman Andrei Nesterenko, as reported by the AP: Moscow wants NATO to listen to its concerns and hold serious discussions on the Kremlin's proposal for an overarching new...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/russia-to-nato-no-really-after-you-i-insist/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>As Hungary&#8217;s &#8220;Correction&#8221; Heads For A Dead End, Time For A Change Of Course?</title>
		<link>http://www.straightstocks.com/investing-lessons/as-hungarys-correction-heads-for-a-dead-end-time-for-a-change-of-course/</link>
		<comments>http://www.straightstocks.com/investing-lessons/as-hungarys-correction-heads-for-a-dead-end-time-for-a-change-of-course/#comments</comments>
		<pubDate>Sun, 20 Sep 2009 16:42:00 +0000</pubDate>
		<dc:creator>Edward Hugh</dc:creator>
				<category><![CDATA[Economics]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Eastern Europe]]></category>
		<category><![CDATA[eastern europe economy watch]]></category>
		<category><![CDATA[Employment]]></category>
		<category><![CDATA[Erika Molnarfi]]></category>
		<category><![CDATA[Ft Alphaville]]></category>
		<category><![CDATA[hand]]></category>
		<category><![CDATA[href]]></category>
		<category><![CDATA[hungarian prime minister]]></category>
		<category><![CDATA[Hungary]]></category>
		<category><![CDATA[IMF's;]]></category>
		<category><![CDATA[July]]></category>
		<category><![CDATA[kaminska]]></category>
		<category><![CDATA[main opposition party]]></category>
		<category><![CDATA[national consensus]]></category>
		<category><![CDATA[parliamentary vote]]></category>
		<category><![CDATA[Romania]]></category>
		<category><![CDATA[sector]]></category>
		<category><![CDATA[Viktor Orbán;]]></category>
		<category><![CDATA[year]]></category>

		<guid isPermaLink="false">tag:blogger.com,1999:blog-1443720106009957151.post-8543683705795973156</guid>
		<description><![CDATA[Hungary's economic correction still fails to convince. Indeed I am not the only one who remains unconvined by the viability of what is currently taking place it seems, since according to the opposition supporting local daily newspaper Magyar Hírlap, none other than the Hungarian Prime Minister himself may be having doubts, as he is reportedly thinking of leaving the helm of the struggling ship placed under his charge before the next general election, which is scheduled to take place sometime early next year.br /br /If this version of events is ultimately confirmed it will only add to the IMFs growing problems out East, since events in Latvia are not going at all according to their liking - see FT Alphaville's Izabella Kaminska's "a href="http://ftalphaville.ft.com/blog/2009/09/18/72706/another-latvia-wobble/"Another Latvian wobble/a" of last Friday - and indeed Latvia’s government rapidly cobbled together another 275 million lati ($575.6 million) in spending cuts for 2010 yesterday after EU Economic and Monetary Affairs Commissioner Joaquin Almunia called on Latvia on Friday to “renew a national consensus”, and Prime Minister Valdis Dombrovskis paid a flying vist to Brussels, following a parliamentary vote against sending a real-estate tax bill through to the committee stage, implicitly rejecting part of an agreement with the IMF and EU. How many times this year does that now make it that the national consensus has had to be urgently renewed under directives from either Washington or Brussels, could someone please remind me?br /br /Further, Hungary's main opposition party - Fidesz - which looks well-positioned to win next year's general elections, are threatening to rewrite the current ever-so-carefully written 2010 budget when they comes to powe next year, according to the latest statements from party president Viktor Orban.br /br /"This (the IMF text, EH) is the most dangerous budget of the past 20 years ... never before has a budget put hundreds of. thousands, or even millions of Hungarian families at such grave risk," Orban told private broadcaster Hir TV in an interview late on Friday. "This budget will not remain in place, we will draw up another one instead," said Orban, a former prime minister, adding that if in power, his government would create one million new jobs in 10 years.br /br /Well, things certainly do not look good either for Gordon Bajnai or for the EU Commission/IMF team who are behind the budget. Perhaps that is why the IMF's representative in Hungary, Iryna Ivaschenko, told national news agency MTI yesterday that while the government was committed to its 2010 fiscal targets, there were economic and implementation risks on the nature of which she declined to elaborate.br /br /strongAs Political Pressures and Bad Loans Mount, While The Economy Retreats Underground, It Is Hard To See How The "Correction" Can Work/strongbr /br /Clearly the above mentioned report about the PMs intentions does come from a rather biased source, but it is interesting to note that credibility is being given to it by a href="http://www.portfolio.hu/en/cikkek.tdp?k=2amp;i=18483"normally more impartial sources like Portfolio Hungary/a, and as they themselves point out there has been no outright denial of the suggestion from government sources.br /br /Perhaps even more astonishing was a href="http://online.wsj.com/article/BT-CO-20090918-708158.html"the statement by the Hungarian Finance Minister Peter Oszko to Dow Jones Newswire on Friday/a that the most difficult reforms to address economic imbalances have now been completed. "I believe the most difficult part of our job is done - our package creates not only short-term but mid- and long-term fiscal balances" he said. I say astonishing, since as far as I personally can see (take a look for yourself at the charts below) the changes that are needed haven't even begun yet. The whole emphasis have been on cutting the deficit, with little serious thought being given about how the Hungarian economy can get back to growth - which is the only real way the fiscal balances can become stable - all that seems to have happened is a 5% VAT hike to squeeze domestic consumption even further, and some compensatory tax changes on the other side to stimulate employment, but the real economic imbalances have been left untouched. A supply side micro-economists paradise, whisper the words "long term steady state growth" to yourself three times, cross your fingers, and hope for the best.  br /br /However, the underlying mirky political realities may soon burst their way into the parlour room, to disrupt this happiest of happy families. Indeed everything may well now hinge on getting the budget through parliament and then disrcetely leaving by the side entrance, since Magyar Hirlap suggest that the Hungarian Parliament may well be dissolved directly after the vote on the 2010 budget - which is currently scheduled for 30 November. Apparently everyone's calculations have been thrown awry by the early re-election of José Barroso, and the imminent reappointment of the EU Commission. Plenty of food for thought here.br /br /The paper also suggests that Prime Minister Gordon Bajnai now totally accepts that the forthcoming electtions are inevitably lost - the only bit of realism I can see in all this - and  as a consequence seeks to have them advanced to February from the currently probable date of April or May.br /br /In this way Bajnai would be able to offer himself to replace the present Hungarian representative László Kovács, who is currently Commissioner for Taxation and the Customs Union. Bajnai, it will be remembered, has only been Prime Minister since last April, but then, with these sort of techniques it doesn't take that long to put a country straight, now does it?br /br /Advancing elections in a situation where the present budget proposals are massively unpopular may make perfect sense according to a certain democratic political logic, but the economics lying behind the idea must be making people in Washington and Brussels throw up their arms in despair.br /br /More evidence to back the idea that the current programme is not working came in the latest report released by the committee which monitors the long term legalisation of Hungary's underground economy. The process is not only not advancing - it has been thrown into reverse gear, it seems.br /br /According to Committee president, and Central Statistical Office analyst, Csák Ligeti some HUF 100 billion (EUR 369.17 million) in tax revenues were lost in the first half of the year due to a ressurgence in the growth of the black economy. In his report he noted, by way of contrast, that during the previous two years the state budget had received around HUF 200-250 billion (EUR 738.1-922.6 million) in extra revenue due to the "whitening" process initiated in the autumn of 2006 as part of a programme to correct the large fiscal deficits the country was running.br /br /On another front, the IMF warned last week that while Hungary's banking sector had so far weathered the crisis reasonably well - thanks to the multilateral rescue programme - and now has sufficient capital buffers, asset quality still looks set to deteriorate steadily due to weakness in the domestic economy, and especially rising unemployment. This, of course, is another good reason why they should have been including a rapid return to export lead growth in the correction strategy, since obviously if you simply sit back and wait to see what happens, there will be no big surprise - the percentage of Non Performing Loans will just go up and up.br /br /br /"Developments in the banking sector have been positive; so far so good, and in line with one of the main objectives of the (IMF) program to preserve financial stability," Iryna Ivaschenko, the IMF's resident representative in Hungary, told Down Jones in an interview on Thursday.br /br /However she immediately added that the IMF projects the amount of non-performing loans, which stood at a "still moderate" 4.8% of overall loans at the end of June, "will peak and at least double in the first quarter of 2010,".br /br /This IMF warning follows a Standard and Poor's one at the end of August. The financial profile of Hungarian banks is set to weaken over the near term as a result of the country's ongoing recession, the weak and volatile national currency, and pressure on funding, according to the Samp;P report.br /br /The report, which was entitled "Banking Industry Country Risk Assessment: Hungary", followed the recent decision by Standard amp; Poor's to revise its ranking of the Hungarian banking system to reflect increased economic risks in the country (BBB-/Negative/A-3) and structural weaknesses in the country's economy and banking industry.br /br /"Hungary's significant external financing needs, which stem from high public-sector leverage and large external imbalances, represent a structural weakness that exposes the economy to the tight and expensive funding conditions in global markets," according to Standard amp; Poor's credit analyst Harm Semder, who wrote the report.br /br /The report argues that nonperforming loans and depressed recovery rates are likely to cause a material rise in credit losses, which will in turn subdue bank profits and capital through 2011.br /br /Credit risk is heightened by the rapid growth of unseasoned loans - particularly commercial real estate mortgages - over the past five years and a significant increase in loans denominated in foreign currency that lack the foreign currency revenues to service them.br /br /The report estimates that cumulative gross problematic assets, which include restructured loans and repossessed collateral, could increase to 25%-40% of total loans during the course of the current domestic recession. It further suggests that the eventual recovery will be slow.br /br /strongWhich Way To Turn? /strongbr /br /The entire situation in Hungary vis-a-vis wages, employment and inflation continues to be preoccupying. The country is in the midst of a huge correction, and depends on improving exports in order to attain economic growth.br /br /Yet the correction is not proceeding as planned. Inflation - at an annual rate of 5% in August, is far too high in contrast to benchmark German inflation which remained negative in August (minus 0.1% )  to be recovering competitiveness. Real wages have continued to rise, and only sneaked into negative territory for the first time in over six months in July - with a 1.1% drop in the benchmark ex-bonus hourly rate in the private sector. Total employment is falling slowly, but even this process masques an important shift towards public sector employment, as the number of public employees has risen substantially in recent months while the number of employees in the private sector has continued to fall - exactly the opposite of what was meant to be happening. Meanwhile the country continues to get ever deeper in debt thanks to the relatively generous financing conditions offered by the EU and the IMF. The point is where does this all end? Where is the correction here?br /br /The National Bank of Hungary is struggling to find an adequate monetary response. The bank lowered its benchmark interest rate by 50 bp to 8% last week, but this still represents a real interest rate of around 3%.br /br /The move followed a surprise 100-bp rate cut at the end of July. While a month ago, the market was expecting 50 bp easing, this time there was no real surprise. As for the future, the National Bank of Hungary release uses standard central bankspeak that intentionally remains ambiguos and guarantees the Bank Council is not committed in any particular direction. As long as there is no change in the international environment over the coming months, the the Council will be most likely having to decide whether to cut a further 50 bp or more.br /br /So while the bank has evidently eased policy considerably, monetary conditions are evidently still far too tight to stimulate dynamic activity in the private sector, which is almost literally wilting on the vine at the present time.br /br /Meanwhile, in a further sign that the recession is settling in for the long haul, Hungarian retail sales extended their decline to 29 months in June as IMF/government measures to narrow the budget deficit continued to sap consumer spending.br /br /strongTrue Love In The Eternal Embrace?/strongbr /br /Well, despite the fact that many may think the expression "eternal triangle" in the present context refers to the Hungarian government, the EU Commission and the IMF, they would be wrong since one convenient way of thinking about what just happened in Hungary could be to use another kind of eternal triangle the one developed in  Nobel Economist Paul Krugman’s model of the same name, which postulates that when it comes to tensions within the strategic trio formed by exchange rate policy, monetary policy, and international liquidity flows, maintaining control over any one implies a loss of control in one of the other two.br /br /In the case of the Central Europe “four”, Poland and the Czech Republic opted for maintaining their grip on monetary policy, thus accepting the need for their currency to “freefloat” and move according to the ebbs and flows of market sentiment. As it turns out this decision has served them remarkably well, since the real appreciation in their currencies which accompanied the good times helped take some of the sting out of inflation, while their ability to rapidly reduce interest rates into the downturn has lead to currency depreciation, helping to sustain exports and avoid deflation related issues.br /br /The other two countries (Hungary and Romania), to a greater or lesser degree prioritised currency stability, and as a result had to sacrifice a lot of control over monetary policy, in the process exposing themselves to the risk of much more violent swings in market sentiment when it comes to capital flows. Having been pushed by the logic of their currency decision towards tolerating higher inflation, they have seen the competitiveness of their home industries gradually undermined, and as a consequence found themselves pushed into large current account deficits for just as long the market was prepared to support them, and into sharp domestic contractions once they were no longer disposed so to do.br /br /A second problem which stems from this “initial decision” has been the tendency for households in the latter two countries to overload themselves with unhedged forex loans, a move which stems to some considerable extent from the currency decision, since in order to stabilise the currency, the central banks have had to maintain higher than desireable interest rates, which only reinforced the attractiveness of borrowing in forex, which in turn produced lock-in at the central bank, since it can no longer afford to let the currency slide due to the balance sheet impact on households. Significantly the forex borrowing problem is much less in Poland than it is in Hungary or Romania, and in the Czech Republic it is nearly non-existent.br /br /The third consequence of the decision to loosen control on domestic monetary policy has been the need to tolerate higher than desireable inflation, a necessity which was also accompanied by a predisposition to do so (which had its origin in the erroneous belief that the lions share of the wage differential between West and Eastern Europe is an “unfair” reflection of the region’s earlier history, and essentially a market distortion). The result has been, since 2005, a steady increase in unit wage costs with an accompanying loss of competitiveness, and an increasing dependence on external borrowing to fuel domestic consumption.br /br /So, if we look at the current state of economic play in the four countries, we find two of them (Hungary and Romania) undergoing very severe economic contractions - to such a degree that in both cases the IMF has had to be called in. At the same time both of them are still having to “grin and bear” higher than desireable inflation and interest rates. In the other two countries the contraction is milder, the financial instability less dramatic, and both inflation and domestic interest rates are much lower. Really, looked at in this light, I think there can be little doubt who made the best decision.br /br /strongHungarian GDP - The Big Slide/strongbr /br /While wages and prices more or less steadily wend there way upwards, we have no hurry hear, you understand, GDP has been in freefall. Year on year it was down an annual 7.5% in Q2 (and a seasonally adjusted 2% from the first quarter) . The Hungarian government currently expects the economy to contract 6.7 percent this year, in the largest drop in outout since 1991. My view is that we have a total policy trap in operation here, since neither monetary or fiscal policy are available to an adequate degree (even after today's change interest rates are still at 8%), and there is thus little support available to put under the economy at this point. The only way to break the circle in my opinion is to violently kick start exports by letting the forint drop, bringing down interest rates, and restructuring all those CHF loans.br /br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SrYiQSJ7uGI/AAAAAAAAPN4/7ZbUZQ_U4Cg/s1600-h/GDP+one.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 198px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383528067714758754" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SrYiQSJ7uGI/AAAAAAAAPN4/7ZbUZQ_U4Cg/s400/GDP+one.png" //abr /br /If, instead of browsing over all those diplomatic statements we look at what is going on on the ground, then we find that private sector employment is now well down, by 9.2% y-o-y in July. While in the same month industrial output was down 19.4% over a year earlier. Something just doesn't seem to be working as it should be here.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SrYizn84VdI/AAAAAAAAPOA/4BxDNoySPzs/s1600-h/gdp+2.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 235px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383528674861012434" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SrYizn84VdI/AAAAAAAAPOA/4BxDNoySPzs/s400/gdp+2.png" //abr /br /strongUnbalanced Movements In Employment/strongbr /br /br /Not surprisingly given the strength of the contraction total employment fell back again, for the second consecutive month, in July, and stood at was 2.657 million. There were 1.803 million in the private sector and 765 thousand in the public sector. Total employment was thus down 4.4% over July 2008.br /br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SrYjMdPdzrI/AAAAAAAAPOI/bJALYpx9Rwo/s1600-h/Total+Employment.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 230px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383529101482905266" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SrYjMdPdzrI/AAAAAAAAPOI/bJALYpx9Rwo/s400/Total+Employment.png" //abr /br /Private sector employment is well down in Hungary, by 9.2% y-o-y in July. br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SrYjhWhOb_I/AAAAAAAAPOQ/oz8WCwV36A0/s1600-h/hungary+private+employment.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 229px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383529460455600114" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SrYjhWhOb_I/AAAAAAAAPOQ/oz8WCwV36A0/s400/hungary+private+employment.png" //abr /br /On the other hand, public sector employment has been chugging away on the up and up, due to job creation under the short term stimulus programme, courtesy indirectly of the IMF, who have permitted a larger than anticipated budget deficit.br /br /But don't get me wrong, it's not the stimulus I am quibbling about here, it is what it is being used for, and the absence of a realistic plan. It's easy enough to run up debt, especially when the EU Commission and the IMF guarantee you, but its a lot harder to pay it down again later, and Hungarian debt to GDP now looks set to go through the 80% of GDP level in 2010. So, the outcomes we are seeing simply don't seem to me to be producing a large enough  structural change in the right direction. On the other hand, even this public sector employment boost now seems to have started to turn, since even public sector employment fell back on the month in July - for the first time in six months - although it was still up 5.6% year on year.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SrYkFyQUAcI/AAAAAAAAPOY/TndlIbjRhOU/s1600-h/Hungary+public+sector+employment.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 229px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383530086376145346" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SrYkFyQUAcI/AAAAAAAAPOY/TndlIbjRhOU/s400/Hungary+public+sector+employment.png" //abr /br /Hungary's gross average ex bonus private sector real wages entered negative territory in June, for the fisrt time in over six months, and fell at annual rate of minus 1.1 percent.br /br /Real public sector wages continue to fall sharply, and contracted by an annual 11 percent year-on-year in July following a 13.4 percent contraction in June - although some of the volatility here is the result of a changed system of payment for the additional (13th) month's salary. What is happening in Hungary is really an obvious example of "sticky wages" if ever there was one as far as I can see, since employment in the private sector is falling, and unemployment rising, so you would expect the opposite effect to operate, and real wages to be falling sharply at this point. According to Erika Molnarfi of the stats office, the upward drift in average private sector salaries is the outcome of a sharp decline in production workers which was not accompanied by a decline in administrative workers, exactly the opposite result to that you want to see.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SrYl0kEcCgI/AAAAAAAAPOg/40QHpL5jOrA/s1600-h/hungary+real+wages.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 207px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383531989533723138" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SrYl0kEcCgI/AAAAAAAAPOg/40QHpL5jOrA/s400/hungary+real+wages.png" //abr /br /strongInflation Stubbornly High/strongbr /br /Far from the current recession leading to a significant downward shift in wages and prices, real wages had been rising continuously until July, while Hungary's consumer prices were still running year on year at 5% in August - up from 3.7% in June due to the VAT effect, and still far to high to start restoring competitiveness. . If the current trend continues, and the HUF remains in the region of its current euro parity, then Hungary's agony looks set to continue unabated well into 2010.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SrYnWBt7J0I/AAAAAAAAPOo/CvL6b2DNFeg/s1600-h/hungary+CPI.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 231px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383533663939667778" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SrYnWBt7J0I/AAAAAAAAPOo/CvL6b2DNFeg/s400/hungary+CPI.png" //abr /br /And Hungarian manufacturing output fell back again in July, and industrial output decreased by 19.4% compared to July 2008. The volume of production was 22.1% lower over the first seven months of 2009 than in the same period of the previous year. The volume of industrial production fell back in July by 0,7% on June according to seasonally and working-day adjusted indices. Industrial export sales declined by 25.2% in the first seven months of 2009 and by 19.8% in July compared to the same period of the previous year, as a result of a sharp fall in external demand.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/SrYnzKsJiUI/AAAAAAAAPO4/jl5AlBBl2Nw/s1600-h/IP+two.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 239px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383534164564347202" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SrYnzKsJiUI/AAAAAAAAPO4/jl5AlBBl2Nw/s400/IP+two.png" //abr /br /So Hungary is suffering from a generalised drop in demand - domestic, export, government, and investment - for which it is difficult to see any short term remedy.br /br /Investments fell in the second quarter of 2009 by 4.7% compared to the same period of 2008. In the first half of 2009 investments in the national economy were 6% down over the corresponding period of the previous year. Investments did however increased by 0.4% quarter on quarter, but when we break this down we find that of the 4.7%annual drop in investments in the second quarter those in machinery and equipment fell by 11.6%, while the volume of construction investments – due to investments in dwellings and motorway constructions – grew by 1.1% compared to the same period of 2008. But when we look at the construction data we find that the improvement in construction is all about civil engineering, so any increase in machinery and equipment investment is still some way off at this point.br /br /Evidently the first sign of any real recovery in the Hungarian economy will come when machinery and equipments investments stabilise and even start to increase, since that will be a reflection of the expectation of future demand arriving further down the pipeline, and will be a measure of real employment creating possibilities.br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SrYnn94Z5fI/AAAAAAAAPOw/4mdy1LeP5b0/s1600-h/hungary+IP.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 240px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383533972147529202" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SrYnn94Z5fI/AAAAAAAAPOw/4mdy1LeP5b0/s400/hungary+IP.png" //abr /br /But things don't look set to improve soon, since Hungary's purchasing manager index dropped by 3.4 points to 45.8 points in August, according to the most recent report from the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM). The latest data is highly disappointing not only because Hungarian manufacturing has now been contracting for 11 straight months, but because the August eurozone PMI index showed a larger-than-expected pickup. This thus suggests that Hungary is being left behind in the scramble.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SrYowT1vgnI/AAAAAAAAPPA/Hx7N08i0qig/s1600-h/hungary.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 228px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383535214992523890" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SrYowT1vgnI/AAAAAAAAPPA/Hx7N08i0qig/s400/hungary.png" //abr /br /Estrongxports Remain Weak, And Imports Are Even Weaker/strongbr /br /Hungary recorded its fifth monthly trade surplus in June, coming in at 457,3 million euros slightly below the 490.1 million euros acheived in May but well above the 30.8 million euros of June last year.br /br /Now good news is always good news, but it is important to understand that this result was almost entirely achieved via a dramatic drop in imports, which plunged an annual 30.4 percent in June (following a 32.3 percent decline in May). It is impossible to talk of any marked improvement in exports, since these fell by an annual 21.1 percent, decelerating from the 24.1 percent drop in May, but still very large. While in the short term this substantial drop in imports (and hence rise in the trade balance) is GDP positive, it is very negative for living standards in the longer term, and the whole situation needs to be reversed by a large boost in exports leading imports as the eurozone economy eventually recovers. But to be able to achieve this Hungarian industry needs to do more, much more, to achieve competitiveness.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/SrYpCi4fJMI/AAAAAAAAPPI/-E28gTuFm4I/s1600-h/hungary+exports+one.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 219px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383535528268211394" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SrYpCi4fJMI/AAAAAAAAPPI/-E28gTuFm4I/s400/hungary+exports+one.png" //abr /br /Over the January-June period, the volume of exports and imports fell by 20 and 25 percent, respectively, compared to the same period of the preceding year. The trade balance showed a surplus of HUF 606 billion (EUR 2,055 million), which meant an improvement of HUF 534 billion (EUR 1,766 million) compared to the surplus of HUF 72 billion (EUR 288 million) in January-June 2008. In January-June 2009, the forint price level of exports and imports both increased by 6 percent, respectively, The forint exchange rate had however weakened by 17 percent with repsect to a basket of leading foreign currencies, and within this by 14 percent to Euro and by more than 30 percent to the dollar. So, if getting the growth needed to drive GDP is the objective, and this is any evidence, then there is still a long long way for the forint to fall.br /br /Over January-June 2009, the export and import volumes of machinery and transport equipment, which constitute 60 percent of exports and nearly 50 percent of imports, fell by and above average 24 percent in the case of exports, and by 27 percent in the case of imports.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SrYpH8t1sTI/AAAAAAAAPPQ/eTgFeZUApio/s1600-h/hungary+exports+two.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 205px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383535621102219570" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SrYpH8t1sTI/AAAAAAAAPPQ/eTgFeZUApio/s400/hungary+exports+two.png" //abr /br /br /strongDomestic Demand Drifts On Downwards/strongbr /br /Construction activity was down by 5.1% in July as compared to July 2008. In the first seven months of 2009, output was down by 2.4%. In comparison June, production fell by 12.2% in July according to indices adjusted for seasonality and working days. This large drop is really only a reflect of the pre VAT introduction surge registered in June.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/SrYppTdMt5I/AAAAAAAAPPY/SwNXai0pOV8/s1600-h/hungary+construction+index.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 211px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383536194142123922" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SrYppTdMt5I/AAAAAAAAPPY/SwNXai0pOV8/s400/hungary+construction+index.png" //abr /br /The two construction sectors are moving in opposite directions at the moment. Within the 5.1% aggregate increase, building construction was down by almost a quarter, while civil engineering works expanded by 19.6%. From the start of the year the construction of new buildings is down by 12.7% while civil engineering works are up by 12.3%.br /br /From the September 2006 peak construction activity as a whole is now down by 27.58%. September 2009 will mark the start of the third year of contraction.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SrYp1lfQyAI/AAAAAAAAPPg/QouHCrT2jas/s1600-h/Hungary+construction+P2P.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 212px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383536405141047298" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SrYp1lfQyAI/AAAAAAAAPPg/QouHCrT2jas/s400/Hungary+construction+P2P.png" //abr /br /Hungary's retail sales fell by 2.2% in June compared to June 2008, although sales did increase by 0.5% compared to the previous month. Of course, we need to remember in this case that the 5% VAT hike was introduced on 1 July, so it is perhaps surprising that the increase wasn't bigger.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SrYq7jxgYQI/AAAAAAAAPPo/s9LuB8Cazrg/s1600-h/hungary+retail+one.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 231px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383537607271538946" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SrYq7jxgYQI/AAAAAAAAPPo/s9LuB8Cazrg/s400/hungary+retail+one.png" //abr /br /Thus the month on month increase is very misleading, since it was evidently driven by the government decision to raise value-added tax on the first of July - in an attempt to compensate for revenue losses which will be produced by forthcoming reductions in personal income and payroll taxes . So the increase in sales was in fact due to an attempt to avoid the 5% rise in VAT, and we should be ready for a sharp drop in July. Prime Minister Gordon Bajnai is in the process of implementing spending cuts worth 1.3 trillion forint ($6.9 billion) over a period two years in an attempt to keep the budget deficit in check.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SrYrNA02AdI/AAAAAAAAPPw/oVZ6SlPF3nM/s1600-h/hungary+retail+two.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 229px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383537907127943634" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SrYrNA02AdI/AAAAAAAAPPw/oVZ6SlPF3nM/s400/hungary+retail+two.png" //abr /br /br /strongWhile The Central Bank Is Caught In A Policy Trap/strongbr /br /Hungary’s central bank cut its benchmark interest rate to the lowest level in 17 months at the end of August to try to help jolt the countryt out of its worst recession in almost two decades. The Magyar Nemzeti Bank lowered the two-week deposit rate to 8 percent from 8.5 percent. Monetary policy makers voted for the 50 basis-point cut with an “overwhelming” majority over a reduction to 7.75 percent according to central bank President Andras Simor. In fact the minutesd showed that the bank cut interest rates by a seven to one majority, with one member voting for a 75 base point cut.br /br /In fact many analysts now see further easing in the pipline, but in taking this stance they need to think about two points.br /br /i) The Hungarian government is still incredibly complacent about the inflation problem, and currently forecasts that inflation will only slow by the end of next year to something just below the central bank's current medium-term target which is itself very complacent.br /br /"We expect inflation to slow from [an annual average of] 4.5% this year to 4.1% in 2010. As for 2010, the December inflation figure may start with a digit 2," Finance Ministry State Secretary Tamas Katona told journalists last week.br /br /In its latest report on inflation, published in August, the National Bank of Hungary projected that inflation will likely dip below the 3% mark from the third quarter of 2010 onward. The central bank's annual inflation forecast is 2.5% on average for the second half of next year.br /br /But if Hungary wants to avoid a substantial devaluation then the internal devaluation needs to operate, and to a significant degree, which makes these current forecasts simply laughable. You wouldn't have thought, given all the complacency that the economy was contracting at around an annual 7% rate.br /br /ii) the key problem for the central bank is the value of the forint - given the level of household exposure to Forex loans. My opinion is that the recent recovery in the currency value has been almost entirely driven by yield differentials, and by self-fulfilling expectations (traders expect the currency to rise), rather than by any change in the underlying economic fundamentals, which as we have seen, has not taken place.br /br /But with consumption sinking, government spending falling and exports insufficiently competitive to drive the necessary surplus, the whole thing is now becoming rather a mess, with no clear economic policy objective in the short term (except, of course, cutting the bfiscal deficit and maintaining a strong exchange rate), while in the long term the emphasis is rightly on increasing exports. But no one has any idea of how exactly to correct prices sufficiently with the CHF mortgages stuck in the middle, and it remains to be seen how the markets will ultimately respond to these rate reductions as and when the wind of risk sentiment changes, as it will.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SrYraEKe3sI/AAAAAAAAPP4/01sjcXjRFJo/s1600-h/Hungary+interest+rates.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 248px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383538131362307778" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SrYraEKe3sI/AAAAAAAAPP4/01sjcXjRFJo/s400/Hungary+interest+rates.png" //abr /br /Basically the problem is the value of the forint. My opinion is that the recent recovery in the currency value (see chart below) has been almost entirely driven by yield differentials, and by self-fulfilling expectations (traders expect the currency to rise), rather than by any change in the underlying economic fundamentals, which as we have seen, has not taken place.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SrYrqlSiQwI/AAAAAAAAPQA/PgFMOD5YzdU/s1600-h/five+year+forint+chart.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 241px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383538415132361474" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SrYrqlSiQwI/AAAAAAAAPQA/PgFMOD5YzdU/s400/five+year+forint+chart.png" //abr /br /The problem the central bank and the Finance Ministry have to address is the ongoing issue of the mountain of Swiss Franc denominated mortgages.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SrYr8sm2cVI/AAAAAAAAPQI/zU_SkpP_MU4/s1600-h/forex+mortgages.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 236px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383538726334263634" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SrYr8sm2cVI/AAAAAAAAPQI/zU_SkpP_MU4/s400/forex+mortgages.png" //abr /br /These have stopped increasing in recent times, but still constitute a serious obstacle to any devaluation of the HUF, due to the non performing loans issue this would create for the banking sector. Not only has money been borrowed against homes for to fund house purchases, it has also been loaned for consumption, so indeed the fact that even these loans are stagnating hardly bodes well in any way for domestic demand.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/SrYsNS9ciII/AAAAAAAAPQQ/3jhPKtI3_SY/s1600-h/Hungarian+Refis.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 252px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383539011507488898" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SrYsNS9ciII/AAAAAAAAPQQ/3jhPKtI3_SY/s400/Hungarian+Refis.png" //abr /br /The result of all this botched policy is that Hungary’s EU harmonised unemployment rate rose to the its highest level in at least a decade in May and has been stick there ever since - and with the rise of unemployment, of course the percentage of impaired loans in the banking sector will also continue to grow. The rate rose to a seasonally adjusted 10.3 percent, the highest since at least 1996 and was still there in July (the latest month for which we have Eurostat data).br /br /And the situation is more likely to deteriorate than improve, with the central bank forecasting lay-offs of around 180,000 across 2009-2010, nearly 5% of the total number of employed, and now even the number of employees in the public sector is starting to fall back.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SrYsaZrhBSI/AAAAAAAAPQY/psFFpVqeI-I/s1600-h/hungary+unemployment.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 202px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383539236649633058" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SrYsaZrhBSI/AAAAAAAAPQY/psFFpVqeI-I/s400/hungary+unemployment.png" //adiv class="blogger-post-footer"img width='1' height='1' src='https://blogger.googleusercontent.com/tracker/1443720106009957151-8543683705795973156?l=easterneuropeeconomy.blogspot.com' alt='' //div]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/as-hungarys-correction-heads-for-a-dead-end-time-for-a-change-of-course/feed/</wfw:commentRss>
		<slash:comments>4</slash:comments>
		</item>
		<item>
		<title>There&#8217;s More to Russia&#8217;s Competitiveness Than Meets the Eye</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/theres-more-to-russias-competitiveness-than-meets-the-eye/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/theres-more-to-russias-competitiveness-than-meets-the-eye/#comments</comments>
		<pubDate>Thu, 17 Sep 2009 03:11:41 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Asia]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[aforementioned concerns]]></category>
		<category><![CDATA[Commission of European Communities;]]></category>
		<category><![CDATA[International Bank for Reconstruction and Development]]></category>
		<category><![CDATA[Italy]]></category>
		<category><![CDATA[North Atlantic Treaty Organization]]></category>
		<category><![CDATA[Pakistan]]></category>
		<category><![CDATA[police services]]></category>
		<category><![CDATA[Primo Berlusconi]]></category>
		<category><![CDATA[Reporters without Borders]]></category>
		<category><![CDATA[Russia falls]]></category>
		<category><![CDATA[United States]]></category>
		<category><![CDATA[Venezuela]]></category>
		<category><![CDATA[windfall oil revenues]]></category>
		<category><![CDATA[World Economic Forum]]></category>
		<category><![CDATA[Zimbabwe]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.21433</guid>
		<description><![CDATA[I've finally gotten around to looking more closely at the World Economic Forum's annual Global Competitiveness Report, released last week. The report ranks 133 countries on the basis of 12 measures of an economy's competitiveness: institutions, infrastructure, macroeconomic stability, health...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/theres-more-to-russias-competitiveness-than-meets-the-eye/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Saudi Shopping List for Russian Arms Grows</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/saudi-shopping-list-for-russian-arms-grows/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/saudi-shopping-list-for-russian-arms-grows/#comments</comments>
		<pubDate>Wed, 16 Sep 2009 20:21:36 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Asia]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Defence Department]]></category>
		<category><![CDATA[Department of State]]></category>
		<category><![CDATA[dozen air-defense systems]]></category>
		<category><![CDATA[Gulf News;]]></category>
		<category><![CDATA[Interfax]]></category>
		<category><![CDATA[Saudi Arabia]]></category>
		<category><![CDATA[U.S. government;]]></category>
		<category><![CDATA[United States]]></category>
		<category><![CDATA[UPI;]]></category>
		<category><![CDATA[USD]]></category>
		<category><![CDATA[Venezuela]]></category>
		<category><![CDATA[White House]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.21426</guid>
		<description><![CDATA[Fresh off a deal with Venezuela, Russia's weapons maker appears to have its next willing customer in Saudi Arabia. First reported in English language press on August 29 (Interfax via Bloomberg), we now have significantly more detail on the slow-drip...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/saudi-shopping-list-for-russian-arms-grows/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Still Squaring the NATO-Russia Circle</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/still-squaring-the-nato-russia-circle/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/still-squaring-the-nato-russia-circle/#comments</comments>
		<pubDate>Wed, 16 Sep 2009 18:47:23 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Afghanistan]]></category>
		<category><![CDATA[Anders Fogh Rasmussen]]></category>
		<category><![CDATA[Ariel Cohen;]]></category>
		<category><![CDATA[media  outlets]]></category>
		<category><![CDATA[North Atlantic Treaty Organization]]></category>
		<category><![CDATA[Obama administration]]></category>
		<category><![CDATA[Secretary General]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.21424</guid>
		<description><![CDATA[There are a number of media outlets reporting on the most recent NATO-Russia foxtrot, NATO Secretary General Anders Fogh Rasmussen's call for an "open-minded and unprecedented dialogue" with Russia. Personally, I'd first rather just go straight to the source: Listening...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/still-squaring-the-nato-russia-circle/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Bank Rossii Eases Further As Russia&#8217;s Economy Contracts At A Record Rate</title>
		<link>http://www.straightstocks.com/investing-lessons/bank-rossii-eases-further-as-russias-economy-contracts-at-a-record-rate-3/</link>
		<comments>http://www.straightstocks.com/investing-lessons/bank-rossii-eases-further-as-russias-economy-contracts-at-a-record-rate-3/#comments</comments>
		<pubDate>Tue, 15 Sep 2009 13:22:00 +0000</pubDate>
		<dc:creator>Edward Hugh</dc:creator>
				<category><![CDATA[Economics]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[abr]]></category>
		<category><![CDATA[Alexander Kudrin]]></category>
		<category><![CDATA[bank loans]]></category>
		<category><![CDATA[chief economist]]></category>
		<category><![CDATA[country]]></category>
		<category><![CDATA[Eastern Europe]]></category>
		<category><![CDATA[eastern europe economy watch]]></category>
		<category><![CDATA[Economic Contraction]]></category>
		<category><![CDATA[economy and society]]></category>
		<category><![CDATA[Erik Berglof;]]></category>
		<category><![CDATA[Frank Gill;]]></category>
		<category><![CDATA[inflation problem]]></category>
		<category><![CDATA[July]]></category>
		<category><![CDATA[massive problem]]></category>
		<category><![CDATA[percent]]></category>
		<category><![CDATA[procrustean bed]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[russian economy]]></category>
		<category><![CDATA[s1600]]></category>
		<category><![CDATA[src]]></category>
		<category><![CDATA[year]]></category>

		<guid isPermaLink="false">tag:blogger.com,1999:blog-1443720106009957151.post-4177869725047534002</guid>
		<description><![CDATA[Russia’s central bank this week lowered its main interest rates for the seventh time since April 24 - lowering the refinancing rate a further quarter percentage point. The decision came hard on the heels of the announcement that the Russian economy suffered a record economic contraction in the second three months of the year and refelect the growing recognition that the country now faces a painfully slow recovery. Just how painful things might become will form the subject matter of this report.br /br /strongRisks Rising On All Frontsbr //strongbr /Bank Rossii cut the refinancing rate to 10.5 percent from 10.75 percent (following a quarter point reduction on August 10), and lowered the repurchase rate charged on central bank loans to 9.5 percent from 9.75 percent, effective from tomorrow. The bank has now cut the rates six times since April 24. Nonetheless Russia’s benchmark refinancing rate is still the second-highest in Europe, after the 12% on offer in Serbia and Iceland - meaning ruble denominated assets remain an attractive carry pair with either Euro or USD, and that with inflation stuck around the 12% mark the problems for central bank monetary policy are legion.br /br /br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/Sq4-MqTA1TI/AAAAAAAAPKU/XDcdafNv__w/s1600-h/russia+interest+rates.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 231px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5381306991987709234" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Sq4-MqTA1TI/AAAAAAAAPKU/XDcdafNv__w/s400/russia+interest+rates.png" //abr /br /In the report that follows I will argue how the steady and systematic long term mismanagement of Russia's monetary policy has now created a veritable Procrustean bed of problems for Russia's economy and society. Failure to address the underlying inflation problem between 2005 and 2008 meant that large structural distrortions were accumulated in the economy, including a massive problem of commodity export dependence, a problem which effectively turned the country into a veritable disaster waiting to happen if ever there should be a protracted lull in the secular rise in energy prices. That lull has now arrived, and it is not at all clear just for how long we will all need to get to learn to live with it. p/ppIn a more or less reasoned analysis Capital Economics suggest that oil prices could fall back to somewhere around $50 a barrel in 2010. If this forecast proves anywhere near correct, the Russian economy is going to be subject to major downside risks, due to the difficulties posed by:br /br /i) financing the fiscal deficitbr /ii) rising unemploymentbr /iii) growing bad loans in the banking systembr /iv) refinancing external debtbr /v) the continuing high level of consumer price inflation and the difficulties this poses for monetary policy at the central bankbr /br /Added to all this, the economy will clearly not rebound as easily as many seem to foresee, adding to the risk element on all fronts. The Russian Economy Ministry seem to be getting ahead of themselves at the moment, since following a period when they have tried to get the bad news all out up front, just last week they decided to raise their 2010 forecast to a growth of 1.6 percent - up from the previous 1 percent forecast. This growth, if realised, would follow an anticipated shrinkage of some 8.5 percent this year, based on the September 9 estimate of Economy Minister Elvira Nabiullina that output may grow 3.9 percent to 4.5 percent in the second half of this year compared with the first six months - such strong optimism I find hard to accept, unless the turnround in global economic activity turns out to be much stronger than the one we are currently seeing.br /br /strongIs The Worst Really Behind Us?/strongbr /br /Gross domestic product contracted an annual 10.9 percent in the second quarter, according to the Federal Statistics Service. The headline number represented a worsening in the year on year performance following a 9.8 percent contraction in the first quarter. Evidently the Russian economy has been extremely hard hit by the worst global financial crisis since the Great Depression as demand for Russia’s oil, natural gas and metals (around 80% of total ex-CIS exports), and industrial production plunged as companies depleted stocks and struggled to raise funds during the credit crunch.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SoFfRELAMLI/AAAAAAAAOzU/qBZtwHwQfK0/s1600-h/GDP.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 230px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5368676977584648370" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SoFfRELAMLI/AAAAAAAAOzU/qBZtwHwQfK0/s400/GDP.png" //abr /br /Manufacturing contracted an annual 18.7 percent in the quarter compared with a 23.5 percent drop in the first quarter, while construction was down 20.5 percent in the period following a 20.9 percent annual decline in the first three months. Retail sales fell an annual 11.3 percent, more than twice the pace of decline in the first quarter when they shrank by 4.9 percent. Capital investment slumped by an annual 23.1 percent in May, the most since December 1998. The Russian government forecasts that GDP may fall by as much as 8.5 percent for all of 2009, following growth of 5.6 percent in 2008 and 8.1 percent in 2007. p/pbr /pstrongLooking Into The Third Quarterbr //strongbr /br /However the contraction evidently eased in the second three months of the year, and while the Russian Statistics Office do not publish seasonally adjusted estimates of quarterly movements in GDP, Neil Shearing at Capital Economics estimates the economy effectively moved sideways, with roughly zero percent growth (plus or minus a tiny fraction on either side). Moving forward into the thirds quarter, the best measure we have of the current activity level is the GDP Indicator compiled for VTB Capital by Markit Economics on the basis of their Composite PMI. /ppInterestingly, the Indicator moved back intopositive territory in August, posting above the neutral level of 50.0 for the first time since last September. That said, the latest reading of 52.2 suggested only a moderate rate of expansion in activity, and remained well below the long-run series average, while both the contry's services and manufacturing sectors posted equally modest month-on-month gains in activity. So we could say the economy continued to move more or less sideways on the month with the quarterly rate still standing at the slightly negative minus 0.2%.br /br //pa href="http://1.bp.blogspot.com/_ngczZkrw340/SqfWy2vgL_I/AAAAAAAAPHk/UT3zUc6EHTg/s1600-h/GDP+indicator+3.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 246px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379504449093906418" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SqfWy2vgL_I/AAAAAAAAPHk/UT3zUc6EHTg/s400/GDP+indicator+3.png" //abr /br /Now while the GDP indicator continued to show quite a strong year on year contraction in August of minus 3.9%, this was well down on May’s revised record rate of minus 9.9%. So while the Indicator has now spent nine months in negative territory - a longer sequence than the earlier seven-month record run from September 1998 to March 1999 - as companies produce direct for new demand, and government stimulus spending has its effect, the rate of contraction has eased notably. But it is worth noting that the current average rate of decline - minus 6.4% - is much sharper than that seen in the 1998 downturn, while we should be asking ourselves, absent a clear rebound in energy prices, just how sustainable the current improvement is.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SqfWvL2O4tI/AAAAAAAAPHc/9y964kguY9c/s1600-h/GDP+indicator+2.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 245px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379504386039800530" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SqfWvL2O4tI/AAAAAAAAPHc/9y964kguY9c/s400/GDP+indicator+2.png" //abr /br /Over the second quarter as a whole, the Indicator averaged a revised annual minus 9.2%, far worse than the annual minus 6.2% posted in Q1. The first two quarters of 2009 have seen steeper contractions than in any previous quarter since the current time series began in June 1998. However,the Indicator does show a slower rate of annual decline for Q3 since the average so far, is minus 5.2% over July-August.br /br /strongIndustrial Output Trending Upbr //strongbr /Russian industrial production rose for a second consecutive month in July, and the year-on-year decline eased after the central bank cut rates and the government ramped up spending. Output rose 4.7 percent from June, after a 4.5 percent rise the previous month, and on an annual basis declined 10.8 percent compared with 12.1 percent in June, according to the Federal Statistics Service.br /br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SqfW_3y8Q4I/AAAAAAAAPH8/OKALb3y8fi0/s1600-h/russia+IP.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 235px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379504672715064194" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SqfW_3y8Q4I/AAAAAAAAPH8/OKALb3y8fi0/s400/russia+IP.png" //abr /br /VTB’s Russian Manufacturing Purchasing Managers’ Index also advanced in August to 49.6 from 48.4 July.br /br /blockquote“Modest production growth was supported by a second successive monthly increase in new orders, which reflected stronger market activity, particularly at home,” the report said. At the same time, “excess resources remained a key feature,”with “employment, backlogs and inventories all continuing to fall.”/blockquotepbr /br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/SqfYKWXjiOI/AAAAAAAAPIk/u8V74wdM9h0/s1600-h/russia.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 244px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379505952232016098" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SqfYKWXjiOI/AAAAAAAAPIk/u8V74wdM9h0/s400/russia.png" //abr /br /In addition Russia’s services sector returned to growth during August. Both the level of activity and amount of new business rose for the first time since last September, resulting in an overall improvement in the business climate. Employment continued to fall, but the rate of job shedding was at its slowest in ten months. Costpressures intensified again, but remained subdued whencompared against the long-run trend for the survey.br /br /The August services PMI rose by 3.7 points, reaching 52.2, ending a ten-month sequence of decline in the service sector. That said, the survey organisers were at pains to point out that the latest figure still pointed to a relatively muted rate of expansion compared to the survey’s long-run trend.br /br /br //pp/ppa href="http://2.bp.blogspot.com/_ngczZkrw340/SqfYDVn7DvI/AAAAAAAAPIc/SFuGLwHMpmI/s1600-h/russia.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 244px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379505831773146866" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SqfYDVn7DvI/AAAAAAAAPIc/SFuGLwHMpmI/s400/russia.png" //abr /br /strongAs Unemployment Rises, And Incomes Fall, Domestic Demand Shrinksbr //strongbr /Russia's unemployment rate has been declining recently after reaching its highest level in more than 8 years (8.8%) in April. The unemployment rate continued to decrease in August in all Russia’s 47 regions, according to the latest statement from the Russian Ministry of Health and Social Development. Still, the current 8.2% rate is still very high by Russian standards.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/Sq5FV0ez91I/AAAAAAAAPKs/zsIhlkw4HWM/s1600-h/russia+unemployment.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 202px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5381314845921769298" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Sq5FV0ez91I/AAAAAAAAPKs/zsIhlkw4HWM/s400/russia+unemployment.png" //abr /br /Household income which had begun to strengthen following last winters dramatic fall, began to weaken in late spring and was down 5.4% year on year in August, providing additional evidence that the stimulus spending isn't working out exactly as intended.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/Sq5FNnnCQnI/AAAAAAAAPKc/cP-o10peUCE/s1600-h/disposable+income.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 244px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5381314705027646066" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Sq5FNnnCQnI/AAAAAAAAPKc/cP-o10peUCE/s400/disposable+income.png" //abr /br /And so, not surprisingly Russian retail sales dropped the most in almost ten years in July, sliding for a sixth consecutive month, as households cut back spending in response to falling income and limited consumer borrowing possibilities. Sales slid 8.2 percent from a year earlier after declining 6.5 percent in June, according to the Federal Statistics Service.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/SqfX4pAGrBI/AAAAAAAAPIU/a1zP5jtgG7Q/s1600-h/russia+retail+sales.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 243px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379505647996283922" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SqfX4pAGrBI/AAAAAAAAPIU/a1zP5jtgG7Q/s400/russia+retail+sales.png" //abr /strongInflation Still The Big Bugbearbr //strongbr /The best think that can be said about Russian monetary policy instruments is that they are hopelessly ineffictive. Even though August consumer-price growth was probably much lower than July’s 12 percent pace it is still extremely hard to understand how incompetence can have reached such a level that an economy which has been contracting at more than 10 per cent a year can still have double digit consumer proce inflation. There is no other word for it, this is a mess.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/Sqf-6u490cI/AAAAAAAAPIs/lnXuwVdEsaM/s1600-h/russia+inflation.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 241px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379548564890177986" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Sqf-6u490cI/AAAAAAAAPIs/lnXuwVdEsaM/s400/russia+inflation.png" //abr /br /Producer prices at least have been falling, and slid again in July for the eighth consecutive month as industrial production slumped and companies competed by discounting products amid waning demand, according to the press release from the State Statistics Service. The price of goods leaving factories and mines was in fact down a record 12.3 percent compared with July 2008 after sliding an annual 9.4 percent in June. The pressure on wages and incomes is thus easy to see. What is not so easy to see is why domestic prices take so long in responding to these signals and the Economic Development Ministry still expects inflation to range from 12 percent to 12.5 percent in 2009 from last year’s 13.3 percent. Stunning!br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SqfW3XvkjkI/AAAAAAAAPHs/Wx7qqPKByr8/s1600-h/producer.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 242px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379504526672039490" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SqfW3XvkjkI/AAAAAAAAPHs/Wx7qqPKByr8/s400/producer.png" //abr /Now suprisingly one of the biggest problems Russia faces as a result of this very disorderly contraction is a sharp fall in capital investment, which is dropping steadily almost with no relief. Down 18.9% year on year in July.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/Sq5FRxJNUtI/AAAAAAAAPKk/iFxyZPtGIaE/s1600-h/fixed+capital.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 217px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5381314776306373330" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Sq5FRxJNUtI/AAAAAAAAPKk/iFxyZPtGIaE/s400/fixed+capital.png" //abr /br /So, as the Federal government pounds in stimulus after stimulus, while oil prices however in the $70 dollar a barrel range, the country now risks returning to a period of entrenched budget deficits that may threaten its credit rating and lead directly to further ruble devaluation. The country faces “still-substantial risks to public finances due to the severe economic contraction” and financial risks linked to “stress” in the financial industry and liabilities of state-run companies, according to Standard amp; Poor’s analyst Frank Gill. /ppAccording to Gill, if the government fails to rein in the budget shortfall, the credit rating may be cut from its current BBB rating. Russia's budget deficit widened in the first eight months of 2009 to the equivalent of 5.9 percent of GDP, according to Finance Minister Alexei Kudrin following a shortfall of 4.3 percent in the first seven months. The expectation now is that the deficit may come in at around 8.9% of GDP on the whole year.br /br /On the other hand the government stimulus plans involve an average outgoing of between 850 billion rubles ($26.8 billion) and 900 billion rubles a month this year following a 1.5 trillion ruble jumpstart in December. In its attempt to plug the gap the government is drawing on its $85.7 billion Reserve Fund and $90.7 billion National Wellbeing fund, which were built on windfall oil revenue, tin order to pay for an “anti-crisis” program that estimated to be worth about 2.5 trillion rubles ($79 billion) you include the tax breaks, central bank lending and all the other multifarious measures.br /br /With the Reserve Fund expected to be drained by the end of next year, Russia will need turn to international debt markets for the first time since 1998, and is seeking to raise $17.8 billion from investors next year, according to Alexander Kudrin. This will mean the country’s debt to GDP ration - which is still very, very low by international comparisons - will more than double by 2012, growing from 6.5 percent of GDP in 2008 to 16.4 percent by 2012 according to Finance Ministry estimates. /ppbr /strongHow To Get Out Of the Mess/strongbr /br /Well, one way not to solve the problem would be a ruble devaluation according to European Bank for Reconstruction and Development Chief Economist Erik Berglof. Even while recognising that the country has a very difficult couple of years in front of it, Berglof argues “this (devaluation) is the wrong way to think about the recovery in Russia”.br /br /As he says, Russia’s failure to wean itself off its reliance on commodity exports has condemned the country struggling to find economic growth in the face of a large drop in demand for its key export products. “If you want to have a flexible exchange rate, you need to get out of this dependence on commodities,” Berglof said. “It’s a major concern that in the last 10 years Russia has become actually more dependent on commodities. Unfortunately, not much progress has been made.”br /br /Well, this is eaxctly the point, and is why I have been arguing over the last two year about how all those wage increases which the Russian administration seemed to rejoice in (since they bought short term popularity) simply fuelled domestic inflation and in the process did untold damage to domestic competitiveness. However it is evident Russia's industries cannot now simply be transformed overnight, and this is where I find a weakness in Berglofs argument, since some remedy is needed to straghten out the distortions and get of commodity export dependence. But what? If it isn't devaluation, then surely we will need to see very substantial wage deflation in order to attract the now much needed inward foreign investment.br /br /Of course not everyone agrees with Berglof, and the Russian Association of Regional Banks, whose 450 members include the Russian units of Barclays and Citigroup, has called for a devaluation of as much as 30 percent. Billionaire Vladimir Potanin, realist and owner of 25 percent of OAO GMK Norilsk Nickel, said in recent interview with the Russian Newspaper Vedomosti that the “interests of the economy” will lead the currency to depreciate in the “mid term,” allowing exporters to cut costs and modernize production.br /br /Nonetheless energy, including oil and natural gas, accounted for 69.1 percent of exports to countries outside the former Soviet Union and the Baltic states during the first seven months of this year, according to the Federal Customs Service, while metals were responsible for another 12%. So the commodities dependency is massive, and this situation can't be turned round easily./ppstrongGetting Carried Away By Global Liquidity?br //strongbr /Bank Rossi are also not 100% convinced by Berglof's reasoning, as witnessed by the fact that they facilitated a 35 percent depreciation in the ruble during the second half of last year (see chart below), and as the collapse in raw material prices and the dramatic change in local credit conditions first pushed Russia's economy into recession the ruble’s trading range was widened to between 26 and 41 against the dollar-euro basket.br //ppa href="http://2.bp.blogspot.com/_ngczZkrw340/Sq6fJnRHmlI/AAAAAAAAPK8/1chKNHSl6oE/s1600-h/rouble+one.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 242px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5381413592262744658" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/Sq6fJnRHmlI/AAAAAAAAPK8/1chKNHSl6oE/s400/rouble+one.png" //abr /br /br /However the central bank is now locked on the horns of a massive dilemma, since as risk appetite returns, with it comes the enthusiasm for buying the so called "high yield" currencies - like the South African Rand, the Russian ruble and the Hungarian forint. Instruments denominated in all these currencies offer investors substantial returns at the present time thanks to offering some of the highest interest rates among globally traded currencies.br /br /Indeed buying Russian rubles was one of the key recommendations made by Angus Halkett, currency strategist at Deutsche Bank in London, in a research report published back in April, and the market seems to have followed his advice The so-called carry trade works by investors borrowing in currencies with low interest rates and good prospects of continuing depreciation (the USD at the moment, for example) in order to buy higher-yielding assets, in countries with high domestic interest rates and continuing prospects for ongoing appreciation.br /br /In general, engaging in one or other form of the thousand-and-one-varieties carry trade is pretty standard practice during times when returns for real economic activity are low, and central banks hold down rates and supply liquidity. Indeed we may include here the kind of carry practiced by banks in borrowing from the central banks only to then lend - for a small, but very low risk, interest rate commission - to their national government, who at this stage in the business cycle will normally be running a fiscal deficit. So more than funding recovery, the watchword at the moment is very much "carry on carrying".br /br /But for those on the receiving end, the consequences of so much carry are far from innocuous, since the process simply funds all sorts of economic distortions, and far from allowing normal market corrections to occur, it simply amplifies the problem. And this is exactly what is starting to happen now in Russia. The ruble had its biggest weekly advance in more than three months last week as risk sentiment rose, following industrial output data from China, which is now the world’s second-largest energy user, which simply showed output increased at a faster pace than forecast.br /br /As a result the ruble tends to rise as risk sentiment does, and in particular as economic data exceeds consensus expectations, and the currency has now been on an upward trend since mid-August (see chart below), gaining 0.7 percent to 30.6629 per dollar last Friday alone. This was the highest close since July 27. Over the week as a whole the ruble appreciated 3.1 percent, the most since the week ending May 22. So things are now becoming very detached from the so called "fundamentals" (whatever those might be in the topsy turvy world in which we now live), since it simply is not plausible that the currency should be rising in this way in a country with 12 percent consumer price inflation and which badly needs to move away from commodity export dependency. The only conclusion which could be drawn is that the Russian economy now needs massive structural reforms, and on any imaginable scenario in the world in which I live these are simply not going to be implemented.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/Sq6fD-_TMdI/AAAAAAAAPK0/HF-GbyiSl_g/s1600-h/rouble+2.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 242px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5381413495551242706" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Sq6fD-_TMdI/AAAAAAAAPK0/HF-GbyiSl_g/s400/rouble+2.png" //abr /strongBad Loans About To Surge?/strong/ppbr /We also need to consider what is going on in the banking system. According to the lastest report from Standard and Poor's Russian banks currently face “increasing system-wide risks” as loan quality deteriorates and borrowers struggle to keeps their heads above water during the record economic contraction.br /br /Samp;P last week downgraded Bank Vozrozhdenie’s credit rating to B+ from BB- and Alfa Bank, Russia’s biggest private lender, was cut to B+ from BB- as a signal to the industry. As the ratings agency indicated, the inability of Russian companies to continue to make their debt payments will more than likely further stifle lending as banks channel funds into building up their reserves. /pblockquote“The ratings on Bank Vozrozhdenie broadly reflect the increasing system wide risks in Russia due to the economic recession and deteriorating operating environment,” the Samp;P analysts said. “The downgrade primarily reflects deteriorating asset quality for Bank Vozrozhdenie, and the entire Russian banking industry, owing to the continuing economic slowdown.”/blockquoteOAO Sberbank, VTB Group and other lenders are also facing a surge in “troubled assets” that may total $213 billion, according to an earlier Standard amp; Poor’s report in June - with as much as 38 percent of all assets held by Russian banks possibly becoming problematic by the end of 2011. Russia's banks had already set aside 1.5 trillion rubles ($48.9 billion) in July to cover overdue debt, a monthly increase of 7.6 percent compared to a rise of 6.9 percent in June, according to the last statement from Bank Rossii (Sept. 1).br /br /Sberbank’s provisions for the rising debt reached 388.1 billion rubles, or 7.1 percent of total lending, as of June 30, according to the bank itself. The share of bad loans in the second quarter jumped to 6.4 percent from 3.5 percent in the first quarter, while year-to-date lending by the bank was only up 0.4 percent.br /br /At Bank Vozrozhdenie, Samp;P's estimate that about 15.7 percent of loans are “under stress,” Samp;P. The bank, which focuses on lending to small and medium- sized businesses, saw non-performing loans rise to 7.3 percent at the end of the second quarter, compared with 3.4 percent in the first three months of the year.br /br /Overdue bank loans in the system as a whole reached 5.5 percent of total lending in July, compared with 5 percent a month earlier, with overdue corporate loans jumping to 5.3 percent in July from 4.8 percent in June. The bank corporate loan books fell by 0.2 percent in July, while lending to households was down 0.4 percent for the sixth consecutive monthly decline.br /br /br /strongRussian Outlook/strongbr /br /In this report we have identified how steady and systematic long term mismanagement of Russia's monetary policy how now created a veritable Procrustean bed of problems for Russia's economy and society. Failure to address the underlying inflation problem between 2005 and 2008 meant that large structural distrortions were accumulated in the economy, including a massive problem of commodity export dependence, a problem which effectively turned the country into a veritable disaster waiting to happen if ever there should be a protracted lull in the secular rise in energy prices. That lull has now arrived, and it is not at all clear just for how long we will all need to get to learn to live with it. p/ppIn a more or less reasoned analysis Capital Economics suggest that oil prices could fall back to somewhere around $50 a barrel in 2010. If this forecast proves anywhere near correct, the Russian economy is going to be subject to major downside risks, due to the difficulties posed by:br /br /i) financing the fiscal deficitbr /ii) rising unemploymentbr /iii) growing bad loans in the banking systembr /iv) refinancing external debtbr /v) the continuing high level of consumer price inflation and the difficulties this poses for monetary policy at the central bankbr /br /Added to all this, the economy will clearly not rebound as easily as many seem to foresee. The Russian Economy Ministry seem to be getting ahead of themselves here, since only last week they raised their 2010 forecast to 1.6 percent growth from 1 percent. This would follow an anticipated shrinkage of some 8.5 percent this year. Economy Minister Elvira Nabiullina said on Sept. 9 output may grow 3.9 percent to 4.5 percent in the second half of this year compared with the first six months - and this I find hard to accept, unless the turnround in global economic activity turns out to be much stronger than the one we are currently seeing. The consequence of this is that it will still be some years before Russian GDP even gets back to the 2008 level, as Capital Economic's Neil Shearing recently argued (see chart below).br /br /pa href="http://4.bp.blogspot.com/_ngczZkrw340/SqfXHWUVRFI/AAAAAAAAPIM/a2UkAZJxXPU/s1600-h/shearing.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 253px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379504801167262802" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SqfXHWUVRFI/AAAAAAAAPIM/a2UkAZJxXPU/s400/shearing.png" //abr /br /I also agree with Neil that while financing the Russian deficit is unlikely to add to the inflation issues (given the substantial output gap under which the economy currently labours) underlying inflation is bound to remain well above any reasonable comfort zone, and this will complicate policy decisions enormously.br /br /Financing the fiscal deficit - which looks set to top 9% of GDP this year and despite some planned fiscal consolidation is unlikely to fall much below 5% of GDP in2011 - is not a major problem for the government, although the issue of which currency to issue the inevitable bonds in will be, since the likelihood of devaluation at some point remains large - Neil Shearing expects the currency to fall by 10% against its dollar/euro basket over the next six months or so, breaching in the process the current lower bound of the trading range, and this it seems to me is a perfectly reasonable expectation.br /br /Of course, talk at this point of a return to the sort of chaos we saw in 1998 is certainly premature, especially with debt to GDP only just breaking the double digit frontier. But serious issues do lie ahead in 2010, not least of them how to recapitalise Russia's badly wounded domestic banking system, and how to refinance all the outstanding forex denominated corporate debt. Of course, if we are living a fairytale version of Alica in Dynamic Global Recovery land, then demand for Russia's commodity exports will surge again in 2010 and 2011. But what is we aren't, and demand remains muted, or more financial problems break out on Europe's perfifery? Perhaps the prudent investor will be able to spare the time to give just a little thought to the likelihood of this second, and definitely less apetising scenario./pdiv class="blogger-post-footer"img width='1' height='1' src='https://blogger.googleusercontent.com/tracker/1443720106009957151-4177869725047534002?l=easterneuropeeconomy.blogspot.com' alt='' //div]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/bank-rossii-eases-further-as-russias-economy-contracts-at-a-record-rate-3/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>The Unrequited Eastern Partnership with Georgia</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/the-unrequited-eastern-partnership-with-georgia/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/the-unrequited-eastern-partnership-with-georgia/#comments</comments>
		<pubDate>Mon, 14 Sep 2009 15:10:26 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Caucasus]]></category>
		<category><![CDATA[Commission of European Communities;]]></category>
		<category><![CDATA[Georgia]]></category>
		<category><![CDATA[Sweden]]></category>
		<category><![CDATA[Tbilisi]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.21397</guid>
		<description><![CDATA[The French think tank IFRI has published a 22-page report on the Eastern Partnership initiative (EaP) and Georgia which finds that significant problems and obstacles exist for the establishment of a successful neighborhood policy.&#160; We still think the EU has...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/the-unrequited-eastern-partnership-with-georgia/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Viktor Yushchenko Winding Down</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/viktor-yushchenko-winding-down/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/viktor-yushchenko-winding-down/#comments</comments>
		<pubDate>Mon, 14 Sep 2009 14:33:05 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Barack Obama]]></category>
		<category><![CDATA[Georgia]]></category>
		<category><![CDATA[Moscow]]></category>
		<category><![CDATA[president]]></category>
		<category><![CDATA[Prime Minister]]></category>
		<category><![CDATA[Ukraine]]></category>
		<category><![CDATA[United States]]></category>
		<category><![CDATA[Viktor Yanukovich]]></category>
		<category><![CDATA[Yulia Tymoshenko]]></category>
		<category><![CDATA[Yushchenko]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.21395</guid>
		<description><![CDATA[Things are looking pretty bad for the Ukrainian President Viktor Yushchenko.&#160; Following Dmitry Medvedev's direct attack on his candidacy, Russia has successfully made itself indispensable in this election ... it seems they have learned from the last time.&#160; These comments...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/viktor-yushchenko-winding-down/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Prieur’s readings (September 14, 2009)</title>
		<link>http://www.straightstocks.com/investing-in-china/prieur%e2%80%99s-readings-september-14-2009/</link>
		<comments>http://www.straightstocks.com/investing-in-china/prieur%e2%80%99s-readings-september-14-2009/#comments</comments>
		<pubDate>Mon, 14 Sep 2009 07:08:30 +0000</pubDate>
		<dc:creator>Prieur du Plessis</dc:creator>
				<category><![CDATA[China]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Market Commentary]]></category>
		<category><![CDATA[Ambrose Evans-Pritchard]]></category>
		<category><![CDATA[America]]></category>
		<category><![CDATA[Art Carden]]></category>
		<category><![CDATA[Central Banks]]></category>
		<category><![CDATA[Economist]]></category>
		<category><![CDATA[European Central Bank]]></category>
		<category><![CDATA[finance]]></category>
		<category><![CDATA[Financial Times]]></category>
		<category><![CDATA[Floyd Norris;]]></category>
		<category><![CDATA[Hussman Funds]]></category>
		<category><![CDATA[incumbent secretary]]></category>
		<category><![CDATA[investment postcards]]></category>
		<category><![CDATA[Irwin Stelzer]]></category>
		<category><![CDATA[Jane Smiley]]></category>
		<category><![CDATA[Jean Claude Trichet]]></category>
		<category><![CDATA[Joe Nocera;]]></category>
		<category><![CDATA[John Hussman]]></category>
		<category><![CDATA[Joseph Stiglitz;]]></category>
		<category><![CDATA[Lehman]]></category>
		<category><![CDATA[Main Street]]></category>
		<category><![CDATA[New York post]]></category>
		<category><![CDATA[Newsweek]]></category>
		<category><![CDATA[Niall Ferguson;]]></category>
		<category><![CDATA[Obama administration]]></category>
		<category><![CDATA[oil analysts;]]></category>
		<category><![CDATA[Organization Of Petroleum Exporting Countries]]></category>
		<category><![CDATA[president]]></category>
		<category><![CDATA[Secretary]]></category>
		<category><![CDATA[Sp 500]]></category>
		<category><![CDATA[Steven Horwitz (Forbes)]]></category>
		<category><![CDATA[the Huffington Post]]></category>
		<category><![CDATA[the New York Post]]></category>
		<category><![CDATA[the New York Times]]></category>
		<category><![CDATA[the Washington Post]]></category>
		<category><![CDATA[Timothy  Geithner;]]></category>
		<category><![CDATA[Treasury Building]]></category>
		<category><![CDATA[United States]]></category>
		<category><![CDATA[Us Treasury]]></category>
		<category><![CDATA[Vivienne Walt]]></category>
		<category><![CDATA[wall street]]></category>
		<category><![CDATA[Wolfgang Munchau]]></category>

		<guid isPermaLink="false">http://www.investmentpostcards.com/?p=11042</guid>
		<description><![CDATA[This post provides links to a number of thought-provoking articles I have read over the past few days that you may also find interesting. Please also add the links to any other worthwhile articles you would like to share to the comments section. ]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-china/prieur%e2%80%99s-readings-september-14-2009/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>There Is Another Shoe To Drop In The Global Economic and Financial Crisis &#8211; And The Focus Will Be On Europe&#8217;s Perifery</title>
		<link>http://www.straightstocks.com/investing-lessons/there-is-another-shoe-to-drop-in-the-global-economic-and-financial-crisis-and-the-focus-will-be-on-europes-perifery-2/</link>
		<comments>http://www.straightstocks.com/investing-lessons/there-is-another-shoe-to-drop-in-the-global-economic-and-financial-crisis-and-the-focus-will-be-on-europes-perifery-2/#comments</comments>
		<pubDate>Fri, 11 Sep 2009 18:00:00 +0000</pubDate>
		<dc:creator>Edward Hugh</dc:creator>
				<category><![CDATA[Economics]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Anatole]]></category>
		<category><![CDATA[Anatole Kaletsky;]]></category>
		<category><![CDATA[Austria]]></category>
		<category><![CDATA[bond]]></category>
		<category><![CDATA[Brian Lenihan]]></category>
		<category><![CDATA[Chrystia Freeland]]></category>
		<category><![CDATA[countries in eastern europe]]></category>
		<category><![CDATA[Debt]]></category>
		<category><![CDATA[defenestrated]]></category>
		<category><![CDATA[Dominic Bryant]]></category>
		<category><![CDATA[Eastern Europe]]></category>
		<category><![CDATA[eastern europe economy watch]]></category>
		<category><![CDATA[Ecb]]></category>
		<category><![CDATA[Economy Minister]]></category>
		<category><![CDATA[government]]></category>
		<category><![CDATA[Greece]]></category>
		<category><![CDATA[href]]></category>
		<category><![CDATA[Ireland]]></category>
		<category><![CDATA[Italy]]></category>
		<category><![CDATA[Japan]]></category>
		<category><![CDATA[money]]></category>
		<category><![CDATA[National Economic Council;]]></category>
		<category><![CDATA[Portugal]]></category>
		<category><![CDATA[serbia and croatia]]></category>
		<category><![CDATA[Spain]]></category>
		<category><![CDATA[spanish economy]]></category>
		<category><![CDATA[spanish radio station]]></category>
		<category><![CDATA[US]]></category>

		<guid isPermaLink="false">tag:blogger.com,1999:blog-1443720106009957151.post-611036466426390820</guid>
		<description><![CDATA[blockquote'As far as I am concerned, this is ... the most complex crisis we've ever seen due to the number of factors in play'br /Spanish Economy Minister Pedro Solbes speaking to the Spanish radio station Punto Radio September 2008br /br /“‘The global imbalances have to add up to zero and so, if the US is going to be less the consumer importer of last resort, then other countries are going to need to be in different positions as well."br /Director of the US president’s National Economic Council Larry Summers, speaking over lunch with the FT’s Chrystia Freeland./blockquotebr /br /Basically what we now have before us - as Pedro Solbes pointed out before being uncerimoniously defenestrated from the inner circle of the Spanish government - is an extremely complex situation and problem set. The background has evidentally been an unprecedented global financial and economic crisis, but this crisis has affected countries unequally, and it is noteworthy just how many people in what could be called the "weaker" countries have often sought refuge in the global nature of the crisis, rather than asking themselves just what it is exactly about their own particular economy that makes them "weaker", and more vulnerable, and why the crisis has struck more severely "here" rather than "there". Thus there is a great danger that people take refuge in the fact that the crisis is global in order to avoid thinking about the actual reality that faces them. This danger becomes even more of an issue as some countries begin timidly to return to growth, leaving others stuck in the mire - and possibly in danger of bringing the whole pack of cards tumbling down on top of them again. One such danger is evident in China (for which see the numerous warnings from Andy Xie) but others are for me somewhat nearer home, on Europe's periphery. A number of countries in Eastern Europe immediately come to mind - not only the Baltics, but also Russia, Ukraine, Bulgaria, Romania, Hungary, Serbia and Croatia. And in Southern Europe Spain and Greece stand out as in particular need of what Jean Claude Trichet would undoubtedly call "extreme vigilance".br /br /If we leave out Russia (which is arguably a rather special case due to its dependence on energy revenue), then the simple fact of the matter is that what all of these countries had in common during the bubble years was that they were all running large (unrealistically large) current account deficits, which were produced to fuel strong credit driven housing and consumption booms. The crisis has struck all these countries like a shot of lightening for the simple reason that under present conditions such current account deficits are now no longer sustainable.br /br /br /Now, the only way forward for such countries, as Paul Krugman points out (a href="http://www.newsweek.com/id/190340"citing Reinhardt and Rogoff/a) is to export their way back to growth, and to demonstrate how this might work Krugman produced a simple chart in his Lionel Robbins lectures, which although rather rough and ready does serve the purpose adequately well.br /br /br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SqSy1lOw-jI/AAAAAAAAPD8/1ePubgZRqDg/s1600-h/krugman+trade+surplus.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 254px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5378620488584067634" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SqSy1lOw-jI/AAAAAAAAPD8/1ePubgZRqDg/s400/krugman+trade+surplus.png" //abr /br /So the central point I wish to make is that all these countries now need to run current account and trade surpluses to generate headline economic growth and to start paying down the external debt they accumulated during the heady years of the boom. Countries are no different to households in this sense. And the wider the current account deficit at the height of the boom, the bigger the correction needed. Without the much needed correction these countries simply will not recover, and we will see the famous "L" shaped recovery. If people think otherwise they are simply deluding themselves.br /br /The situation in the US and the UK is, of course, not that different structurally from that which is to be found in some parts of Eastern and Southern Europe, but it is less extreme, in that the Current Account deficit peaked at between 5% amp; 6% of GDP. This is still large, and correcting it is going to be one of the very good reasons that the global economiy ISN'T going to return to any kind of strong growth anytime soon, given the strategic importance of the economies concerned.br /br /The UK and the US do, however, have one large and significant advantage over the worst affected countries in South and East of Europe, and this lies in the fact they can issue debt in their own currency, and they can allow that currency to devalue, and that in fact is the road that both these countries are now going down. But remember, the result of this is that US and UK consumers will now play little part in facilitating headline growth in the global economy, since they themselves will now be net savers. But most of the worst affected East European economies are either locked-into currency pegs with the euro (the Baltics and Bulgaria), or cannot devalue very far due to the strong dependence on forex loans (Romania and Hungary) or both. Nor can these countries realistically expect to issue debt in their own currencies. So they are in effect in a very parlous situation, on financial life support from the EU and the IMF, while unable to make sufficient adjustments sufficiently quickly to stop unemployment rising out of hand, and non performing loans piling up in the banking sector.br /br /Which brings us to Southern Europe. Italy is a case apart - since it is "simply" suffering from a kind of ageing-related terminal slow death "Venice style", and thus has a different problem set - in particular, while the Italian government is heavily in debt, Italian households are strong net savers, and thus any eventual default would be largely a "home team" issue. Portugal, Greece and Spain, on the other hand, were all running large CA deficits between 2000 and 2008, and these are deficits are now being forceably closed. But of course, and here comes the rub, these countries don't have their own currency - they have to issue debt in euros, and they can't simply fuel inflation (like they did in the past) since they can't print money, only the ECB can do that, and the ECB is a multi-national not a national institution.br /br /Now people over at the ECB are well aware of this problem, and the bank is facilitating all the liquidity these countries need in the short term, but it is so very important important to understand this only aids liquidity, it does not resolve the solvency-related issues (which the individulal countries have to sort out for themselves) and in fact the short term palliative only adds to long term accumulated debt problem if the breathing space offered is not taken advantage of. And, here comes the problem, since all the available evidence suggests that the correction the ECB would like to be funding is either not taking place, or is taking place too slowly to be of much use. That is, the ECB has the funding capacity, but it does not have the necessary political clout.br /br /Take Spain for example - Spain's external debt is continuing to rising even as I write, while at the same time GDP is falling, and will continue to fall untill we get back to export competitiveness. Worse, nominal GDP (that is current price GDP) is now falling faster than real (inflation-adjusted) GDP, so the value of the debt remains - in money terms - where it is, while GDP shrinks in relation to this absolute reference point - both in real terms, and even more so in nominal terms. I have been following this problem in Japan for the best part of a decade now, and the solution is evidently not an easy one, since - if you take the core core price index - Japan never really came out of deflation after 1998, and land prices are now back at the levels of somewhere in the early 1980s. Needless to say, if this repeats itself in Spain, the mess will not be a pretty one, and the problem for the ENTIRE global financial system will be substantial, due to the counterparty risk element.br /br /So we are really caught on the horns of a dilema here, Spain and other EU periphery countries have to deflate (willingly or unwillingly, they need to carry out what has now come to be known as "internal devaluation") but so long as they fail to do this and to attract sufficient investment for new export industries to turn the economic dynamic around AND as long the rest of the global economy doesn't recover strongly enough with some countries starting to shoulder significant deficits again, then we are all only going to plumb the bottom. Worse, unemployment will continue to mount, and bad debts pressurise the banking system, which is where the next shoe might then not only drop, but be forced right off the foot first.br /br /The only way in which it would be possible for these countries to attract the necessary investment to be able to start to create employment employment again would be to restore competitiveness, and over the time horizon we should be thinking about this is impossible for them to do via productivity improvements alone: hence the pressing urgency for the "internal devaluation" solution.br /br /And let's not be fooling ourselves here - the main reason those famous government bond "spreads" have all tightened so impressively recently has been the willingness of the ECB to discount the national government bonds which are first purchased by local financial entities and then passed on for discounting at the ECB - a practice one of my Spanish friends calls the "truco del almendruco" (that is, you sell the 10,000 euro new car for 9,995 euros thus changing the key headline digit, giving everyone the impression there has been a large and significant discount, and, oh yes, first of all you need to dump a href="http://macro-man.blogspot.com/2009/06/wheelie-big-deal.html"a wheelbarrow load of cash/a on the banks - in this case on a href="http://macro-man.blogspot.com/2009/06/drawer.html"a one year financing basis/a).br /br /blockquote"Between October 2008 and April 2009 MFIs’ net purchases of debt securities issued by the euro area general government sector totalled €217 billion in the context of rapidly declining short-term interest rates. This entirely reversed the net sales of €191 billion observed between December 2005 and September 2008 in the context of rising short-term interest rates."br /a href="http://www.ecb.int/pub/pdf/mobu/mb200906en.pdf"ECB Monthly Bulletin, June 2009/a/blockquotepSo what I am saying is that the ECB is effectively conducting expansionary fiscal policy in the Eurozone countries - by buying a large part of the new government debt, a state of affairs which is in fact equivalent to conducting Quantitative Easing via the back door, while the EU/IMF tandem is offering similar support to the key countries in the East. Anatole Kaletsky a href="http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article6597813.ece"made a similar point in the Times back in June/a, when the ECB announced its €442 billion of new cash into the euro money markets in what  was the biggest long-term lending operation in the history of central banking and roughly equivalent to half the Fed’s entire monetary expansion in the past 18 months.br /br /blockquoteThe Fed has “monetised” roughly $1 trillion of US Government debt since 2007, if we combine its Treasury and agency bond buying. Meanwhile, the ECB has lent $1.5 trillion to the euro-area banks. But what have the euroland banks done with this new money? They have lent most of it straight to their governments. Indeed, the governments in Ireland, Greece, Portugal, Spain and Austria would long-since have gone bust had it not been for the willingness of the commercial banks in these struggling economies to buy unlimited quantities of government bonds with money borrowed from the ECB. And these bond purchases have, in turn, been used as collateral for more ECB borrowings, which could be used to buy more government bonds.br /br /In effect, therefore, the ECB has been lending money by the shed-load to governments, with commercial banks acting merely as a fig leaf for what would otherwise be seen as a blatant monetisation of the most insolvent European countries’ public debt./blockquotebr /br /Now Anatole only has it half right here, the objective is not to finance dubious government debt in semi-bankrupt countries (Italy, for example), but to enbale those countries who had been running extraordinarily large current account deficits (Spain, Greece and Portugal) to close the deficits gradually (ie without precipitating a dramatic implosion in their economies) by facilitating government borrowing to fill the gap left by domestic and corporate deleveraging. The situation I am trying to describe is perhaps best illustrated by the following chart on Financial Balances prepared by PNB Paribas Chief European Economist Dominic Bryant for a recent research report on Spain.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SqU87Qu03WI/AAAAAAAAPEE/hqld1wM_1Ek/s1600-h/financial+balances.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 251px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5378772318765243746" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SqU87Qu03WI/AAAAAAAAPEE/hqld1wM_1Ek/s400/financial+balances.png" //abr /br /As households and companies desperately try to save, to put some sort of order back into their balance sheets, government steps in (Krugman's push button "G") to help ease the transition. Such a policy is, of course, all well and good and totally justified  (since there is effectively no alternative), so long as the structural transition which such support is meant to facilitate is actually carried through. And this is a big if, especially since most of the evidence we have seen to date suggests it isn't. br /br /And then there is the Irish case, and the proposal to create a "bad bank" (NAMA). According to Minister of Finance Brian Lenihan the Irish State plan to buy up toxic property loans with a current face value of €60 billion and investment property loans with a book value of €30 billion, all in exchange for Government bonds. And how will the Irish government finance a possible €90 billion (or two thirds of 2008 GDP) in bonds? We the government plans to pay the banks in bonds which they can then redeem for cash over at the ECB. Obviosuly there is little other way, with such a high proportion of GDP, but has anyone started to think what will happen if the Spanish exchequer is faced with an equivalent proportional sum to clean up bad loans in Spanish banks. Spain, remember is the only major country where there was a property bubble where the banks have not had a substantial capital injection.br /br /And in my humble opinion the ECB  will only be willing and able to continue with this kind of policy for a limited period of time, since they will not be in a position to keep accumulating Irish, Austrian and Southern European bonds ad infinitum, and the sovereign governments won't be able to keep increasing their debt load for ever. Just look, for example at the kind of dynamic Spanish public finances have entered in 2009 (see the acceleration in the cash basis deficit shown for 2009 in the chart below - the evolution is almost exponential, and it still hasn't stopped the haemorrage of jobs out of the economy).br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/SqU_BOU6BAI/AAAAAAAAPEU/2S6uBBKu4cE/s1600-h/Primary+deficit.png"img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 307px;" src="http://2.bp.blogspot.com/_ngczZkrw340/SqU_BOU6BAI/AAAAAAAAPEU/2S6uBBKu4cE/s400/Primary+deficit.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5378774620222129154" //abr /br /We also need to think about the risk the ECB is running of accumulating substantial capital losses if there is a sovereign debt problem (which there most likely will be at some point if the correction is not carried out) in one of the member states as the size of the ECB position simply grows by the day, and ultimately the German and French taxpayers will have to pay the losses being steadily accumulated, something I feel they will be very reluctant if those in the worst case scenario countries continue to harp on about a global economic and financial crisis whilst effectively doing nothing to put their own house in order.br /br /Precisely this point was raised a while back a href="http://blogs.ft.com/maverecon/2009/03/fiscal-dimensions-of-central-banking-the-fiscal-vacuum-at-the-heart-of-the-eurosystem-and-the-fiscal-abuse-by-and-of-the-fed/"by Willem Buiter on his Mavercon Blog/a:br /br /br /blockquoteThe first vacuum is that there is no single fiscal authority, facility or arrangement which can re-capitalise the ECB/Eurosystem when the Eurosystem makes capital losses that threaten its capacity to implement its price stability and financial stability mandates.br /br /The second related vacuum is that there is no single fiscal authority, facility or arrangement which can re-capitalise systemically important border-crossing financial institutions in the EU or the Euro Area, or provide them with other forms of financial support.br /br /When the Bank of England develops an unsustainable hole in its balance sheet, Mervyn King knows he only needs to call one person: Alistair Darling, the UK Chancellor of the Exchequer.  If the Fed were to become dangerously decapitalised, Ben Bernanke also needs to call just one person: Tim Geithner , the US Secretary of the Treasury.  It is possible that no-one in the US Treasury will pick up the phone, as none of the senior political appointments below Geithner are in place yet, but Geithner clearly would be the man to call.br /br /Whom does Jean-Claude Trichet call if the Eurosystem experiences a mission-threatening and mandate-threatening capital loss?  Does he have to make 16 phone calls, one to each of the ministers of finance of the 16 Euro Area member states?  Or 27 phone calls, one to each of the ministers of finance of the 27 EU member states whose NCBs are the shareholders of the ECB?   I don’t know the answer, and I doubt whether Mr. Trichet does./blockquotebr /br /Maybe one day all those phones will be ringing, only for the caller to hear that old Elvis automated operator resonse - "no such number, no such zone".br /br /strongThe G20 Needs A Real Rethink And A New Plan/strongbr /br /So, coming back to where we started, growth in Germany and France. Such growth is unlikely to be anything like as strong as most commentators and analysts seem to be expecting. France will most likely do rather better than Germany, given that the German economy can't really move forward till other key economies move, due to export dependence. The German economy may well even ultimately contract over 2009 as a whole by more than the Spanish economy, and I expect Germany's problems (like Japan's) to continue well into 2010, simply because both these countries are now very high median age societies which are completely dependent on exports to grow - which means that now that the UK, US, Eastern and Southern Europe are no longer running current account deficits, Germany and Japan are very hard pressed to get the level of trade surplus they so badly need for achieving sustainable headling GDP growth, which brings us back to Krugman's joke about which planet is going to do the importing?br /br /Structurally the previous drivers of growth will now fail to work, since as Krugman suggests, all the former CA deficit countries now need to export and run trade surpluses to grow and straighten out their financial imbalances , and it is not clear which countries can buy all the added output, especially when countries in general are still reducing imports, and certainly not about to open up deficits which would soak up all those new surpluses.br /br /Essentially, I would close by emphasising that I am not a complete catastrophist, since I think there is a mid term solution out there - and that the answer lies in steadily unwinding the global demographic and wealth imbalances, through the economic development of a number of key emerging economies - in a way which would perhaps be similar to the implementation of the Marshall Plan which is what really brought the first great global depression to an end.br /br /The problem is that I think we are still some years away from being able to get any sort of agreement on such a programme - as everyone will have noted the G20 isn't really talking about this yet, although I think they eventually will. In the meantime we all have to stagger forward. And it is the risk of further "events" occuring in countries like Latvia and Spain that make all this staggering onwards and downwards ever so dangerous. In all the key countries involved - the Baltics, Bulgaria, Romania and Hungary in the East, and Portugal, Greece and Spain in the South - government support is simply not sufficient to arrest the contraction in Krugman terminology simply hitting the "G" button will not work, and these economies are steadily "imploding" in on themselves, with the result, as I keep stressing, that unemployment inexorably rises, and bad debts simply mount up in the banking system, and if nothing is done to change course the outcome is surely a foregone conclusion./ppThe principal difference between the East and the South is that in the East governments no longer have the capacity to continue to sustain large deficits, while in the South they continue to be able to do so, though even here they cannot hold out indefinitely. Sometime in late 2010 or early 2011 all of this will, with a horrid and almost deterministic inevitability, all come to a head.br /br /And this is why, I personally take the view that the global financial and economic crisis is far from over. There is another stage yet to come, and the focus of the problem will be Southern and Eastern Europe.div class="blogger-post-footer"img width='1' height='1' src='https://blogger.googleusercontent.com/tracker/1443720106009957151-611036466426390820?l=easterneuropeeconomy.blogspot.com' alt='' //div]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/there-is-another-shoe-to-drop-in-the-global-economic-and-financial-crisis-and-the-focus-will-be-on-europes-perifery-2/feed/</wfw:commentRss>
		<slash:comments>5</slash:comments>
		</item>
		<item>
		<title>Latvia&#8217;s Agony Continues In The Second Quarter &#8211; With Little Relief In Sight</title>
		<link>http://www.straightstocks.com/investing-lessons/latvias-agony-continues-in-the-second-quarter-with-little-relief-in-sight-2/</link>
		<comments>http://www.straightstocks.com/investing-lessons/latvias-agony-continues-in-the-second-quarter-with-little-relief-in-sight-2/#comments</comments>
		<pubDate>Wed, 09 Sep 2009 11:29:00 +0000</pubDate>
		<dc:creator>Edward Hugh</dc:creator>
				<category><![CDATA[Economics]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Center]]></category>
		<category><![CDATA[Domestic Consumption]]></category>
		<category><![CDATA[Eastern Europe]]></category>
		<category><![CDATA[eastern europe economy watch]]></category>
		<category><![CDATA[export capacity]]></category>
		<category><![CDATA[Finland]]></category>
		<category><![CDATA[global economy]]></category>
		<category><![CDATA[href]]></category>
		<category><![CDATA[imports and exports]]></category>
		<category><![CDATA[July]]></category>
		<category><![CDATA[Latvia]]></category>
		<category><![CDATA[latvian export]]></category>
		<category><![CDATA[Margin]]></category>
		<category><![CDATA[Quarterly Data]]></category>
		<category><![CDATA[s1600]]></category>
		<category><![CDATA[Spain]]></category>
		<category><![CDATA[Statistics Office]]></category>
		<category><![CDATA[style]]></category>
		<category><![CDATA[TEXT-ALIGN]]></category>
		<category><![CDATA[To Rise]]></category>

		<guid isPermaLink="false">tag:blogger.com,1999:blog-1443720106009957151.post-4280776850132469104</guid>
		<description><![CDATA[a href="http://1.bp.blogspot.com/_ngczZkrw340/SqeIfEhvvOI/AAAAAAAAPG0/gIej76YsWCU/s1600-h/Latvia+exports.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 260px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379418347289951458" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SqeIfEhvvOI/AAAAAAAAPG0/gIej76YsWCU/s400/Latvia+exports.png" //abr /br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/Sqduz5AQyYI/AAAAAAAAPGc/VPWJ-B5zMVI/s1600-h/quarterly+constant+price+imports+and+exports.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 257px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379390117671651714" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Sqduz5AQyYI/AAAAAAAAPGc/VPWJ-B5zMVI/s400/quarterly+constant+price+imports+and+exports.png" //abr /Latvia’s economy shrank a revised 18.7 percent in the second quarter of 2009 over a year earlier in what was the second-steepest drop in the entire European Union (worsted only by Lithuania) according to detailed data released by the statistics office yesterday. The contraction, which is now the largest since quarterly records began in 1995, was revised down from a preliminary estimate of a 19.6 percent annual drop. And Latvia's problem can easily be seen in the above charts which show the most recent movement in exports, and quarterly data for  constant price imports and exports. The Latvian economy grew driven by domestic consumption and increased borrowing during 2006 and most of 2007, but then the country ran out of extra sources of cash, and so imports slumped, followed by exports as the global economy entered crisis. Now its time to pay back, which means the lines we see in 2006 and 2007 will now need to be repeated, only this time with exports on the top and imports below. Of course, really doing this will only be possible once the global economy recovers. But the key question is, will Latvian export capacity be ready when that critical moment comes, or will Latvia's agony continue, stuck in a horrid "L" shaped "non-recovery"? The most recent data on foreign trade, which saw exports fall and the trade deficit once more widen suggest that the latter danger is far from being a mere theoretical one.br /br /And I am not the only one to be raising it, since according to the latest report out from Nordea Bank, Estonia, Latvia and Lithuania, may well suffer deeper economic contractions than previously estimated as government austerity measures simply serves to sap domestic demand while export growth remains muted.br /br /So well done Nordea! But please permit me to say that this discovery does come as a bit rich from analysts who have persistently remained in denial that the key to Latvia's recovery was a substantial reduction in the price level in order to facilitate exports (on my view better achieved by formal devaluation, but by the express desire of the elected political leaders of the Latvian people now being carried out via a convoluted and painful process known as "internal devlauation").br /br /Still, it is interesting to see mainstream analysts starting to question the current orthodoxy that fiscal prudency will (due to the impact on investor confidence) lead to recovery in Eastern Europe, while here in the West our leaders have just re-affirmed the need to maintain fiscal stimulus, given the fragility of even those earliest signs of recovery.br /br /Indeed the analyst consensus is becoming more and more pessimistic. Danske Bank say the following in their latest Emerging Markets report:br /br /"Worries over Latvia’s public finances continue. Despite aggressive cuts in public spending so far this year, total central government spending in August 2009 was, extraordinarily, exactly the same as in August 2008. This is partly due to spending cuts being offset by increased social spending, and partly to some ministries and agencies awarding their employees big pay increases in June this year before imposing cuts in July as part of the IMF/EU programme. It is still too early to say that everything is fine in the state of Latvia."br /br /In the following monthly report I will examine just what evidence there is for the idea that Latvia's economy has actually bottomed out.br /br /strongThe Fall In GDP Continues/strongbr /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/Sqa0a3mc62I/AAAAAAAAPEc/io-30XbYemU/s1600-h/Latvia+GDP+YoY.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 198px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379185178635463522" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/Sqa0a3mc62I/AAAAAAAAPEc/io-30XbYemU/s400/Latvia+GDP+YoY.png" //abr /Latvia’s economy shrank an annual 18.7 percent last quarter, following a drop in gross domestic product of 18 percent in the first quarter. The charge downwards was lead by a decrease in private final consumption which fell an annual 23.21% (year on year - see chart). Government final consumption dropped bya mere 6.9%, but expenditure on gross capital formation (which includes the critical investment item) crashed by 38.1% - with construction (which forms part) down 29.5% (see chart below). Goods exports (63.6% of total exports) was down by 19.1% and the export of services by 15.7%. The slump in imports was, of course) even worse with the volume of goods imports (78.8% of total imports) down 39.4%, and the volume of services imports by 38.2%.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SqdvB0C6TWI/AAAAAAAAPGs/FLxZaoTk9Qk/s1600-h/Latvia+quarterly+construction+output.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 246px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379390356858752354" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SqdvB0C6TWI/AAAAAAAAPGs/FLxZaoTk9Qk/s400/Latvia+quarterly+construction+output.png" //abr /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/Sqdu8b2YLvI/AAAAAAAAPGk/37bcogmW_wY/s1600-h/Latvia+Private+Consumption.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 236px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379390264464387826" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Sqdu8b2YLvI/AAAAAAAAPGk/37bcogmW_wY/s400/Latvia+Private+Consumption.png" //abr /br /strongBut Slows On A Quarterly Basis/strongbr /br /Quarter on quarter, however, the rate of contraction did slow slowed substantially, from an 11% rate in the first quarter to a 1.6% rate in the second quarter. But even though the rate of contraction is now much, much slower, the economy is still contracting, so I think it is not quite accurate to say we have hit bottom yet. And hitting bottom is not the same as recovering, since there is unlikely to be any rapid bounce back, and any "recovery" is likely to have an "L" shape with a slight upward slope.br /br /Meanwhile, and hardly surprisingly, during the month Latvia’s credit rating was lowered by Standard amp; Poor’s, with the long-term foreign currency rating being lowered to BB, two notches below investment grade, from BB+, with a negative outlook. According to Samp;P's:br /br /“The rating action reflects our view of the political and economic challenges as a result of rapidly contracting nominal and real incomes and the associated pressures on public finances, as the country struggles to improve its growth prospects while maintaining a fixed exchange rate regime.....The outlook for growth beyond that remains highly uncertain, not least due to highly leveraged household balance sheets.”br /br /Samp;P's estimate that Latvia’s general government debt, which stood at 19 percent of GDP last year, will grow to over 80 percent in 2011, an estime which is broadly in line with current EU Comission forecasts.br /br /The International Monetary Fund also agreed on August 27 to disburse the second installment (of around 200 million euros) of the 1.7 billion-euro credit line approved last December. The decision followed a long period of uncretainty. Latvia’s government is trying to cut spending/or raise revenue by 500 million lati ($1 billion) a year between now and 2012, in a bid to get the budget deficit below 3 percent of GDP as part of an attempt to meet euro adoption criteria.br /br /The IMF said in their statement that the program had been adjusted to reflect:br /br /br /blockquote- a significant increase in the program’s fiscal deficit ceiling in 2009 (up tobr /13 percent of GDP, compared with 5 percent in the original program) to avoidbr /measures that would harm the most vulnerable, andbr /br /- an allowance of 1br /percent of GDP in additional resources for social safety nets. /blockquotepbr /br /The statement which Moody's following the IMF decision asserting that Latvia’s Baa3 government bond rating - the lowest investment grade, - was being kept at stable was hardly surprising, although the justification they gave - that the bond issuance was supported by “significant, extraordinary fiscal assistance” from international lenders - surely was significant, and very much to the point. The EU Commission and the IMF are now guaranteeing and in order to do this have effectively assumed sovereign responsibility fo the country (see Appendix below)./ppMoody's were also a little more optimistic than Samp;Ps on government debt, since they estimated it would only rise to about 60 percent of gross domestic product in 2010 and fluctuate from about 60 percent to 65 percent over the medium term. I think this is too optimistic, basically for the sort of reasons Samp;Ps are giving. On the other hand they did also state that a currency devaluation, while not being their central scenario, "was a clear risk, along with additional problems in the banking sector".br /br //ppa href="http://4.bp.blogspot.com/_ngczZkrw340/Sqa04qx9YdI/AAAAAAAAPEk/z0ICpJZ46ic/s1600-h/Latvia+GDP+QoQ.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 242px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379185690590142930" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/Sqa04qx9YdI/AAAAAAAAPEk/z0ICpJZ46ic/s400/Latvia+GDP+QoQ.png" //abr /br /strongLittle Sign Of Any Recovery In Main Indicators/strongbr /br /If we now come to the future, we have to note there is little hard evidence at this point for any real recovery - nor should we expect to see any. Industrial output is still falling, and was down 1.4 percent in July over June, and 17.7% year-on-year (over July 2008). This compared with a 18.5% annual fall in the previous month.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/Sqa1Q8Hw5EI/AAAAAAAAPEs/UGpTdceGS7A/s1600-h/Latvia+IP+index.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 224px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379186107561862210" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/Sqa1Q8Hw5EI/AAAAAAAAPEs/UGpTdceGS7A/s400/Latvia+IP+index.png" //abr /br /Latvia's industrial output started falling in February 2008, and has now fallen 22.4% from it peak.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/Sqa1e3i1dMI/AAAAAAAAPE0/7ZmlaasDSUY/s1600-h/Latvia+IP+P2P.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 225px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379186346851398850" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Sqa1e3i1dMI/AAAAAAAAPE0/7ZmlaasDSUY/s400/Latvia+IP+P2P.png" //abr /br /Retail sales were down 1% in July over June, and 29.5% over July 2008.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/Sqa1sIY3-uI/AAAAAAAAPE8/QF3KzE8HDXU/s1600-h/latvia+retail+index.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 225px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379186574711323362" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/Sqa1sIY3-uI/AAAAAAAAPE8/QF3KzE8HDXU/s400/latvia+retail+index.png" //abr /br /Retail sales have now been falling since April 2008, and are now 31.18% below their peak.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/Sqa141i6C_I/AAAAAAAAPFE/tRbOpI9sbrI/s1600-h/Latvian+retail+sales+P2P.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 223px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379186792991427570" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/Sqa141i6C_I/AAAAAAAAPFE/tRbOpI9sbrI/s400/Latvian+retail+sales+P2P.png" //abr /br //ppa href="http://2.bp.blogspot.com/_ngczZkrw340/Sqa5MI4dH7I/AAAAAAAAPFU/uGtCx2jMtsQ/s1600-h/Latvia+exports.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 258px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379190423134478258" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/Sqa5MI4dH7I/AAAAAAAAPFU/uGtCx2jMtsQ/s400/Latvia+exports.png" //abr /br /strongThe Trade Defict Widens in July As Exports Drop Back/strongbr /br /Latvia's July trade deficit was 95.2 million Lati up from 67 million Lati in June. This was the first increase since December 2008. Latvian foreign trade turnover came in at 613.3 mln lats in July, down by 3.8% or 24.5 mln lats in current price terms than a month earlier and and down by 41.1% over July last year.br /br /In the January – July 2009 period foreign trade turnover was 4517.6 mln lats – down by 36.1% or 2547.5 mln lats over the same period in 2008.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SqeIt2fqkvI/AAAAAAAAPHE/Ob9xLs7BNGU/s1600-h/Latvia+trade+deficit.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 261px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379418601221165810" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SqeIt2fqkvI/AAAAAAAAPHE/Ob9xLs7BNGU/s400/Latvia+trade+deficit.png" //abr /br /In July exports were down by 32.6% over July 2008 and imports down 46%. Over January to July exports were down by 27.2% or 705.4 mln lats, while imports were down by 41.2% or 1842.1 mln lats over the same period a year ago.br /br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SqeIorJEVrI/AAAAAAAAPG8/t_cCy3IPkNY/s1600-h/latvia+exports+Y-o-Y.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 260px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379418512274249394" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SqeIorJEVrI/AAAAAAAAPG8/t_cCy3IPkNY/s400/latvia+exports+Y-o-Y.png" //abr /br /br //ppstrongUnemployment Continues To Rise, And As It Does Bad Loans Pile Up In the Banking Sector/strongbr /br /Latvia's unemployment rate hit 17.4% in July according to Eurostat data, and again this was the second highest level in the European Union (after Spain). Naturally with unemployment rising to such levels the number of distressed loans continues to rise and bad debt provisions in the banking sector wnet up again - to 6.6 percent of the total credit portfolio in July from 6.1 percent the month before, according to credit supervisor FKTK.br /br /The FKTK also said in a statement that bank losses by the end of the first seven months had hit 400 million lats ($817.6 million), up from 346.8 million lats at the end of the first half.br /br /Lending was again down, and the total credit portfolio fell by 0.7 percent in July. The level of debts with delayed payments of more than 90 days rose to 13 percent of the credit portfolio from 12 percent at the end of June.br /br /br /br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/Sqa6rmcnqpI/AAAAAAAAPFk/VR3vD9uP4VE/s1600-h/latvia+unemployment+rate.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 220px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379192063158364818" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/Sqa6rmcnqpI/AAAAAAAAPFk/VR3vD9uP4VE/s400/latvia+unemployment+rate.png" //a /ppstrongWhat About The Internal Devaluation, Is It Working?br //strongbr /Well, prices have started falling, and the consumer price level was down in August by 1.0% compared to July. The average prices of goods fell by 1.3%, and of services by 0.4%. But if we compared to August 2008 we find that consumer prices (as measured on the Latvian national index) have incredibly still increased by 1.8% (down admitdely from the 2.5% rate of increase in July), which leads me to ask, given the pain that all of this is evidently causing, are prices still falling too little and too late to do any real good.br /br /br //ppa href="http://3.bp.blogspot.com/_ngczZkrw340/Sqa_Tldw7GI/AAAAAAAAPF8/YOrAAHmTZWY/s1600-h/HICP+general+and+core.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 225px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379197148136008802" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Sqa_Tldw7GI/AAAAAAAAPF8/YOrAAHmTZWY/s400/HICP+general+and+core.png" //abr /br /The central bank seems to think the process is working, since they point out on their website that the real effective exchange rate of the lat, which is one measure of the price competitiveness of Latvian goods versus those of the country's major trading partners, improved between April and July, marking the first four-month gain since the beginning of 2005. We need to remember howvere that the REER index showed prices developing far faster than trading partners all the way from 2006 through to April 2009 (see comparative chart with Finland below) so there really is a long long way back down to go. And if we look at the chart immmediately below, we will see that while the gap is closing Latvian prices are still in a worse position in August 2009 (as compared to other Eurozone countries) than they were in August 2008 - that is over the last year as a whole the position has even deteriorated.br /br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/Sqa_e67Nb_I/AAAAAAAAPGE/WBuJh0xqUZo/s1600-h/HICP+core+EZ16++and+Latvia.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 224px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379197342875217906" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Sqa_e67Nb_I/AAAAAAAAPGE/WBuJh0xqUZo/s400/HICP+core+EZ16++and+Latvia.png" //abr /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SqbAdjiy1nI/AAAAAAAAPGM/M0auk1uFY-8/s1600-h/Latvia+REER.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 225px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379198418930554482" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SqbAdjiy1nI/AAAAAAAAPGM/M0auk1uFY-8/s400/Latvia+REER.png" //abr /A similar picture can be found in producer (factory gate) prices, which have only recently moved into negative territory on an annual basis. To get a comparison, German producer prices were down 7.8% year on year in July, whilebr /br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/Sqa_PsAu6oI/AAAAAAAAPF0/9G97nH1LRuI/s1600-h/Latvia+Producer+prices.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 227px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379197081173813890" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Sqa_PsAu6oI/AAAAAAAAPF0/9G97nH1LRuI/s400/Latvia+Producer+prices.png" //a /ppIn fact, while export prices are dropping substantially, import prices are also falling (see chart), and thus the real rate of price correction is still quite small.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/Sqa_E0cXBXI/AAAAAAAAPFs/J3chM9BBTq8/s1600-h/Latvia+relative+export+and+import+prices.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 192px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379196894458611058" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Sqa_E0cXBXI/AAAAAAAAPFs/J3chM9BBTq8/s400/Latvia+relative+export+and+import+prices.png" //abr /br /I therefore contend that this weeks statement from Unicredit Group Chief Economist Marco Annunziata to the effect that, “For the region as a whole and for Latvia, we have gone through the worst,” is way too premature. Conditions are not improving, and as Moody's suggested pressures in the banking system are still building up. It is an open empirical question at this point whether we have the worst behind us. Even over a longer term horizon it is hard to see the grounds for optimism, since there are certainly no "green sprouts" to be seen on the new babies front, with year on year three month moving average being stuck around the 8% drop level. This depression is going to cast a long shadow over the future of the Latvian people, let's hope for everyone's sake that all those responsible (the government, the IMF, and the EU Commission) are fully aware of their hsitoric responsibilities here.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/SqbEKCqFsPI/AAAAAAAAPGU/lC0_qe7kjFg/s1600-h/latvia+births.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 220px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379202481731776754" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SqbEKCqFsPI/AAAAAAAAPGU/lC0_qe7kjFg/s400/latvia+births.png" //abr /br /br /strongAppendix: IMF and EU Conditions from the respective Letters of Intent./strongbr /br /br /br /According a href="http://www.zerohedge.com/sites/default/files/Latvia.pdf"to the letter of intent/a signed by the Latvian Government, The Central Bank and the IMF, a number of new reporting obligations were agreed to. These include:br /br /* Consolidated central (basic and special budgets), local and general government operations based on the IMF fiscal templatebr /* Detailed information on revenues from EU funds at the general government level, and EU-related spending by the central government, including transfers to local governments for EU-related spendingbr /* Consolidated central and general government bank restructuring operationsbr /* Privatization receipts received by the general government budget (in lats and foreign exchange, and payments in governments bonds)br /* Information on debt stocks and flows, domestic and external (concessional and non concessional), by currency, and guarantees issued by the (i) consolidated central, local and general governments and (ii) public enterprises (including the Latvian guarantee agency andbr /the Rural guarantee fund), including amounts and beneficiariesbr /* Information on new contingent liabilities, domestic and external, of the consolidated central, local and general governmentsbr /* Data on general government arrears, including to suppliersbr /* Data on operations of extrabudgetary fundsbr /* Data on the stock of the general government system external arrearsbr /* Balance sheet of the BoL, including (at actual exchange rate) (i) data on components of program NIR; (ii) government balances at the BoL, broken into foreign exchange balances—distinguishing various program partner sub-accounts for program financing—and balances in lats.br /* Balance sheet of the BoL (in program and actual exchange rates) (i) data on components of program NIR; (ii) government balances at the BoL, broken into foreign exchange balances—distinguishing various program partner sub-accounts for program financing—and balances in lats.br /* Consolidated accounts of the commercial banksbr /* Monetary surveybr /* Currency operations, including government foreign receipts and payments and breakdown of interbank market operations by currencies (interventions)br /* Aggregated data on free collateral—available, unpledged collateral held at the Bank of Latviabr /* Daily data with banks’ current accounts, minimum reserve requirements, stock of repos and fx swapsbr /* Foreign exchange rate databr /* Volume of foreign exchange lats tradesbr /* Projections for external payments of the banking sector falling due in the next four quarters, interest and amortization (for medium and long-term loans)br /* Projections for external payments of the corporate sector falling due in the next four quarters interest and amortization (for medium and long-term loans)br /* The stock of external debt for both public and private sector/pbr /br /br /The Letter of Intent follows the earlier signing of a a href="http://www.fm.gov.lv/preses_relizes/dok/Supplementary_MoU_13%2007%202009_ENG.pdf"Supplementary Memorandum of Understanding between the Latvian government and the European Union/a. The terms of this understanding contained the following Monitoring and Reporting protocols.br /br /br /strongMonitoring fiscal developments/strongbr /br /• Monthly revenue and expenditure break-down of social budget, including data on socialbr /benefits' hand-outs (unemployment, family, etc).br /• Monthly state basic budget expenditure breakdown per type of expenditure for eachbr /ministry or other relevant budget entity.br /• Monthly revenue and expenditure break-down of local governments, including data onbr /GMI hand-outs and other benefits included in category "other social support".br /• Monthly information on debt stocks and flows and guarantees given on new debt,br /contracted by the (i) consolidated central, local and general governments and (ii) publicbr /enterprises.br /• Monthly data on new contingent liabilities of the consolidated central, local and generalbr /governments.br /• Monthly data on state budget loans and PPP projects.br /• Monthly information on central government (i.e., ministries and agencies) and statebr /owned companies' staff and remuneration levels, institution-by-institution, showing lastbr /months'/years' trends.br /• Monthly data on general government arrears, including to suppliers.br /• Bi-weekly Treasury cash-flow assessment of central government financing needs.br /br /br /strongMonitoring financial developments/strongbr /br /• Monthly statements of the operations on the special account.br /• Monthly report on the amount of mortgage loans converted from EUR to LVL.br /• Monthly report on outstanding loans split by currency and detailed to householdsbr /(housing, consumer, other) and non-financial corporations (by sector).br /• Notify DG ECFIN whenever there is a consultation process with DG COMP related tobr /financial sector stabilization (i.e., Parex).br /• Monthly report on banking sector stabilization measures.br /br /strongMonitoring structural reforms/strongbr /br /• Monthly data on budget allocations to and appropriations of line ministries for financingbr /of EU Structural funds and Cohesion fund projects (including which programmingbr /period they are related to).br /• Monthly data on the amounts disbursed to final beneficiaries for projectbr /implementation, by ministry and by EU Structural funds and Cohesion fund projectsbr /(including which programming period they are related to).br /• Monthly data on the amounts spent by state budget financed entities as finalbr /beneficiaries on EU Structural funds and Cohesion fund project implementation, bybr /ministry and by EU fund (including which programming period they are related to).br /• Monthly financial reports on reaching the Structural Funds and Cohesion Fundbr /expenditure targets by the Managing Authority.br /• Quarterly qualitative assessment reports on reaching the Structural Funds and Cohesionbr /Fund expenditure targets by the Managing Authority.br /• Quarterly assessment of policy options taken by the government regarding poverty,br /health and pensions.div class="blogger-post-footer"img width='1' height='1' src='https://blogger.googleusercontent.com/tracker/1443720106009957151-4280776850132469104?l=easterneuropeeconomy.blogspot.com' alt='' //div]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/latvias-agony-continues-in-the-second-quarter-with-little-relief-in-sight-2/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Prieur’s readings (September 8, 2009)</title>
		<link>http://www.straightstocks.com/investing-in-europe/prieur%e2%80%99s-readings-september-8-2009/</link>
		<comments>http://www.straightstocks.com/investing-in-europe/prieur%e2%80%99s-readings-september-8-2009/#comments</comments>
		<pubDate>Tue, 08 Sep 2009 06:22:43 +0000</pubDate>
		<dc:creator>Prieur du Plessis</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Market Commentary]]></category>
		<category><![CDATA[Alan Blinder]]></category>
		<category><![CDATA[Ambrose Evans-Pritchard]]></category>
		<category><![CDATA[ceo]]></category>
		<category><![CDATA[chief executive]]></category>
		<category><![CDATA[chief of staff]]></category>
		<category><![CDATA[Congress]]></category>
		<category><![CDATA[designated chief of staff]]></category>
		<category><![CDATA[Financial Times]]></category>
		<category><![CDATA[Hussman Funds]]></category>
		<category><![CDATA[investment postcards]]></category>
		<category><![CDATA[Jennifer Ablan;]]></category>
		<category><![CDATA[Jo Winterbottom]]></category>
		<category><![CDATA[John Hussman]]></category>
		<category><![CDATA[leading economist]]></category>
		<category><![CDATA[mohamed el erian]]></category>
		<category><![CDATA[newly designated chief]]></category>
		<category><![CDATA[nouriel roubini]]></category>
		<category><![CDATA[Rahm Emanuel;]]></category>
		<category><![CDATA[Reuters]]></category>
		<category><![CDATA[somnambulism]]></category>
		<category><![CDATA[the New York Times]]></category>
		<category><![CDATA[United States]]></category>
		<category><![CDATA[Washington]]></category>
		<category><![CDATA[White House]]></category>
		<category><![CDATA[Wolfgang Munchau]]></category>

		<guid isPermaLink="false">http://www.investmentpostcards.com/?p=10966</guid>
		<description><![CDATA[This post provides links to a number of thought-provoking articles I have read over the past few days that you may also find interesting. Please also add the links to any other worthwhile articles you would like to share to the comments section. ]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-europe/prieur%e2%80%99s-readings-september-8-2009/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Putins Room with a View</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/putins-room-with-a-view/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/putins-room-with-a-view/#comments</comments>
		<pubDate>Fri, 04 Sep 2009 21:41:04 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Russia]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.20677</guid>
		<description><![CDATA[An interesting detail picked up by the Financial Times:Its hard to get a straight answer in Moscow about exactly whose idea it was.Vladimir Putin, Russias prime minister, attended a meeting of world leaders in Poland last week, commemorating the start...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/putins-room-with-a-view/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Energy Blast &#8211; September 1, 2009</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/energy-blast-september-1-2009/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/energy-blast-september-1-2009/#comments</comments>
		<pubDate>Tue, 01 Sep 2009 09:20:43 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Australia]]></category>
		<category><![CDATA[Brazil]]></category>
		<category><![CDATA[Caspian Sea]]></category>
		<category><![CDATA[Donald Tusk]]></category>
		<category><![CDATA[Luiz Inacio Lula]]></category>
		<category><![CDATA[natural gas project]]></category>
		<category><![CDATA[Oil]]></category>
		<category><![CDATA[oil fields]]></category>
		<category><![CDATA[Oil Minister]]></category>
		<category><![CDATA[Organization Of Petroleum Exporting Countries]]></category>
		<category><![CDATA[Poland]]></category>
		<category><![CDATA[premier]]></category>
		<category><![CDATA[president]]></category>
		<category><![CDATA[Prime Minister]]></category>
		<category><![CDATA[Qatar]]></category>
		<category><![CDATA[Turkmenistan]]></category>
		<category><![CDATA[Ukraine]]></category>
		<category><![CDATA[USD]]></category>
		<category><![CDATA[vladimir putin]]></category>
		<category><![CDATA[Yulia Tymoshenko]]></category>
		<category><![CDATA[Zarubezhneft Co.]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.20606</guid>
		<description><![CDATA[ Shell has begun building a $100 million lubricant blending plant in Torzhok, which is the first to be constructed by an international firm in Russia.&#160; After talks with Polish premier Donald Tusk in Gdansk, Vladimir Putin will meet with...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/energy-blast-september-1-2009/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Who Wants to Fight?</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/who-wants-to-fight/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/who-wants-to-fight/#comments</comments>
		<pubDate>Mon, 31 Aug 2009 17:59:32 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Adam]]></category>
		<category><![CDATA[Adam Jasser]]></category>
		<category><![CDATA[Cooperation in Europe]]></category>
		<category><![CDATA[Foreign Minister]]></category>
		<category><![CDATA[Gdansk]]></category>
		<category><![CDATA[Germany]]></category>
		<category><![CDATA[Hitler;]]></category>
		<category><![CDATA[KGB]]></category>
		<category><![CDATA[Lithuania]]></category>
		<category><![CDATA[Organisation for Security and Cooperation]]></category>
		<category><![CDATA[Poland]]></category>
		<category><![CDATA[Putin]]></category>
		<category><![CDATA[Soviet Union]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.20600</guid>
		<description><![CDATA[From the looks of it, neither Vladimir Putin nor Donald Tusk want the Poland-Russia summit in Gdansk tomorrow on the WWII anniversary to turn into a slugfest ... but seemingly everybody else does. &#160;From Reuters:Polish media reacted angrily on Monday...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/who-wants-to-fight/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Berlusconis Grip on Italy Similar to Putin and Chavez</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/berlusconis-grip-on-italy-similar-to-putin-and-chavez/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/berlusconis-grip-on-italy-similar-to-putin-and-chavez/#comments</comments>
		<pubDate>Thu, 27 Aug 2009 22:18:55 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Russia]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.20574</guid>
		<description><![CDATA[From the beginning of Alexander Stilles guest column in the Financial Times:What are we to make of the news coming out of Italy? Showgirls are put up for parliament; Silvio Berlusconi, prime minister, pursues a controversial relationship with a teenage...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/berlusconis-grip-on-italy-similar-to-putin-and-chavez/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Reforming Ukraine through Gas Loans</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/reforming-ukraine-through-gas-loans/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/reforming-ukraine-through-gas-loans/#comments</comments>
		<pubDate>Mon, 24 Aug 2009 14:54:10 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Market Commentary]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Brussels]]></category>
		<category><![CDATA[Center for European Reform]]></category>
		<category><![CDATA[Commission of European Communities;]]></category>
		<category><![CDATA[gas supplies]]></category>
		<category><![CDATA[Gazprom]]></category>
		<category><![CDATA[Gdp]]></category>
		<category><![CDATA[GDP fall]]></category>
		<category><![CDATA[Kiev]]></category>
		<category><![CDATA[Media reports]]></category>
		<category><![CDATA[natural gas market]]></category>
		<category><![CDATA[Tomas Valasek]]></category>
		<category><![CDATA[Ukraine]]></category>
		<category><![CDATA[USD]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.20513</guid>
		<description><![CDATA[Interesting piece here from Transitions Online about the ERBD loan to Ukraine to help them pay their bill to Gazprom ... however this money will only come at the price of Kiev incorporating urgent economic and political reforms.Backed by the...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/reforming-ukraine-through-gas-loans/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Russia-Friendly Missiles?</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/russia-friendly-missiles/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/russia-friendly-missiles/#comments</comments>
		<pubDate>Thu, 20 Aug 2009 14:32:38 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Market Commentary]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Azerbaijan]]></category>
		<category><![CDATA[Boeing]]></category>
		<category><![CDATA[Czech Republic]]></category>
		<category><![CDATA[Georgia]]></category>
		<category><![CDATA[Islamic Republic of Iran]]></category>
		<category><![CDATA[Moscow]]></category>
		<category><![CDATA[paranoia]]></category>
		<category><![CDATA[Poland]]></category>
		<category><![CDATA[Washington]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.20484</guid>
		<description><![CDATA[The words "missiles" and "friendly" don't often go together, but the people at Boeing have sensed an opportunity for such semantic innovation - conveniently they could also make a lot of money from the silly imaginary missile games being played...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/russia-friendly-missiles/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>From Original Sin To The Eternal Triangle &#8211; Lessons From Central Europe</title>
		<link>http://www.straightstocks.com/investing-lessons/from-original-sin-to-the-eternal-triangle-lessons-from-central-europe-2/</link>
		<comments>http://www.straightstocks.com/investing-lessons/from-original-sin-to-the-eternal-triangle-lessons-from-central-europe-2/#comments</comments>
		<pubDate>Fri, 14 Aug 2009 09:02:00 +0000</pubDate>
		<dc:creator>Edward Hugh</dc:creator>
				<category><![CDATA[Economics]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Bulgaria]]></category>
		<category><![CDATA[Central And Eastern Europe]]></category>
		<category><![CDATA[Central Europe]]></category>
		<category><![CDATA[Claus]]></category>
		<category><![CDATA[Control]]></category>
		<category><![CDATA[currency]]></category>
		<category><![CDATA[Czech Republic]]></category>
		<category><![CDATA[decision]]></category>
		<category><![CDATA[domestic currencies]]></category>
		<category><![CDATA[Eastern Europe]]></category>
		<category><![CDATA[eastern europe economy watch]]></category>
		<category><![CDATA[economist paul krugman]]></category>
		<category><![CDATA[exchange rate policy]]></category>
		<category><![CDATA[Foreign Investors]]></category>
		<category><![CDATA[Hungary]]></category>
		<category><![CDATA[inflation]]></category>
		<category><![CDATA[international liquidity]]></category>
		<category><![CDATA[Market]]></category>
		<category><![CDATA[Nobel Economist]]></category>
		<category><![CDATA[Paul Krugman]]></category>
		<category><![CDATA[Poland]]></category>
		<category><![CDATA[policy]]></category>
		<category><![CDATA[Romania]]></category>
		<category><![CDATA[triangle model]]></category>

		<guid isPermaLink="false">tag:blogger.com,1999:blog-1443720106009957151.post-5389241844369313033</guid>
		<description><![CDATA[The non-biblical concept of original sin, as a href="http://fistfulofeuros.net/afoe/economics-and-demography/escaping-original-sin-in-hungary/"Claus Vistesen notes in this post/a, when propounded in its standard Obstfeld amp; Krugman textbook version refers to the situation where many developing economies who are not able to borrow in their own currencies feel forced to denominate large parts of their sovereign and private sector debt in non-domestic currencies in order to attract capital from foreign investors - as evidenced most recently in the countries of Central and Eastern Europe. Well, piling insult upon injury, I'd like to take Claus's point a little further, and do so by drawing on another well tried and tested weapon from the Krugman armoury, the idea of the "eternal triangle".br /br /As is evident, the reality which lies behind the current crisis in the EU10 is complex, and has its origin in a variety of causes. But one key factor has undoubtedly been the decisions the various countries took when thinking about their monetary policy and currency regimes. The case of the legendary euro "peggers" - the three Baltic countries and Bulgaria - has been receiving plenty of media attention on late, and two of the remaining six (Slovenia and Slovakia) are now members of the Eurozone, but what of the other four, Romania, Hungary, Poland and The Czech Republic? What can be learnt from the experience of these countries in the present crisis.br /br /Well, one convenient way of thinking about what just happened could be to use Nobel Economist Paul Krugman’s Eternal Triangle” model (a href="http://web.mit.edu/krugman/www/triangle.html"see his summary here/a), which postulates that when it comes to tensions within the strategic trio formed by exchange rate policy, monetary policy, and international liquidity flows, maintaining control over any one implies a loss of control in one of the other two.br /br /In the case of the Central Europe "four", Poland and the Czech Republic opted for maintaining their grip on monetary policy, thus accepting the need for their currency to "freefloat" and move according to the ebbs and flows of market sentiment. As it turns out this decision has served them remarkably well, since the real appreciation in their currencies which accompanied the good times helped take some of the sting out of inflation, while their ability to rapidly reduce interest rates into the downturn has lead to currency depreciation, helping to sustain exports and avoid deflation related issues.br /br /The other two countries (Hungary and Romania), to a greater or lesser degree prioritised currency stability, and as a result had to sacrifice a lot of control over monetary policy, in the process exposing themselves to the risk of much more violent swings in market sentiment when it comes to capital flows. Having been pushed by the logic of their currency decision towards tolerating higher inflation, they have seen the competitiveness of their home industries gradually undermined, and as a consequence found themselves pushed into large current account deficits for just as long the market was prepared to support them, and into sharp domestic contractions once they were no longer disposed so to do.br /br /A second problem which stems from this "initial decision" has been the tendency for households in the latter two countries to overload themselves with unhedged forex loans, a move which stems to some considerable extent from the currency decision, since in order to stabilise the currency, the central banks have had to maintain higher than desireable interest rates, which only reinforced the attractiveness of borrowing in forex, which in turn produced lock-in at the central bank, since it can no longer afford to let the currency slide due to the balance sheet impact on households. Significantly the forex borrowing problem is much less in Poland than it is in Hungary or Romania, and in the Czech Republic it is nearly non-existent.br /br /The third consequence of the decision to loosen control on domestic monetary policy has been the need to tolerate higher than desireable inflation, a necessity which was also accompanied by a predisposition to do so (which had its origin in the erroneous belief that the lions share of the wage differential between West and Eastern Europe is an “unfair” reflection of the region’s earlier history, and essentially a market distortion). The result has been, since 2005, a steady increase in unit wage costs with an accompanying loss of competitiveness, and an increasing dependence on external borrowing to fuel domestic consumption.br /br /So, if we look at the current state of economic play in the four countries, we find two of them (Hungary and Romania) undergoing very severe economic contractions - to such a degree that in both cases the IMF has had to be called in. At the same time both of them are still having to "grin and bear" higher than desireable inflation and interest rates. In the other two countries the contraction is milder, the financial instability less dramatic, and both inflation and domestic interest rates are much lower. Really, looked at in this light, I think there can be little doubt who made the best decision.br /br /br /strongAppendix/strongbr /br /Here for comparative purposes are charts illustrating the varying degrees of economic contraction, inflation, and interest rates. GDP contraction rates actually present a little problem at the moment, since one of the relevant countries - Poland - still has to report. However Michal Boni, chief adviser to the Prime Minister, told the newspaper Dziennik this week that the economy expanded at an annual rate of between 0.5% and 1% in Q1. So lets take the lower bound as good, it is still an expansion.br /br /pa href="http://4.bp.blogspot.com/_ngczZkrw340/SoReNnb3SNI/AAAAAAAAO20/PZbLd5JX9kc/s1600-h/gdp.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 230px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369520243749636306" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SoReNnb3SNI/AAAAAAAAO20/PZbLd5JX9kc/s400/gdp.png" //abr /br /The economy in the Czech Republic contracted by an estimated 4.9% year on year in the second quarter.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SoRa0kc7W9I/AAAAAAAAO2c/TqBMoe0BlFw/s1600-h/gdp.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 232px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369516514917178322" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SoRa0kc7W9I/AAAAAAAAO2c/TqBMoe0BlFw/s400/gdp.png" //a The Hungarian economy contracted by an estimated 7.4% year on year in Q2.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SoRVn7BXfrI/AAAAAAAAO1s/MvB6QfoCoTo/s1600-h/gdp+2.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 235px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369510800079158962" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SoRVn7BXfrI/AAAAAAAAO1s/MvB6QfoCoTo/s400/gdp+2.png" //abr /br /While the Romanian economy contracted by an estimated 8.8% year on year.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SoRXzn6LCMI/AAAAAAAAO2E/aItzoiUB4Xg/s1600-h/romania+GDP.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 227px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369513200130394306" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SoRXzn6LCMI/AAAAAAAAO2E/aItzoiUB4Xg/s400/romania+GDP.png" //abr /strongInflation Rates/strongbr //ppPoland's CPI rose by an annual 4.2% in July.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SoReJ1l7J-I/AAAAAAAAO2s/hMg_ggvs-TA/s1600-h/CPI.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 186px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369520178830452706" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SoReJ1l7J-I/AAAAAAAAO2s/hMg_ggvs-TA/s400/CPI.png" //abr /The  CPI in the Czech Republic rose by an annual 0.3% in July.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SoRawNheo0I/AAAAAAAAO2U/kIQ1g7Pgvv8/s1600-h/CPI.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 217px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369516440042775362" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SoRawNheo0I/AAAAAAAAO2U/kIQ1g7Pgvv8/s400/CPI.png" //abr /br /Romania's CPI rose by an annual 5.1% in July.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SoRXrb03zgI/AAAAAAAAO10/k50debwd45k/s1600-h/CPI.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 230px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369513059447983618" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SoRXrb03zgI/AAAAAAAAO10/k50debwd45k/s400/CPI.png" //abr /Polands CPI rose by an annual 5.1% in July.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SoRVeUoh23I/AAAAAAAAO1c/RgqFimLXHZ4/s1600-h/hungary+CPI.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 229px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369510635155610482" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SoRVeUoh23I/AAAAAAAAO1c/RgqFimLXHZ4/s400/hungary+CPI.png" //abr /strongInterest Rates/strongbr /br /The benchmark central bank interest rate in Poland is currently 3.5%.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SoReGJHyhFI/AAAAAAAAO2k/fY_N40EBXaQ/s1600-h/interest+rates.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 244px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369520115353289810" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SoReGJHyhFI/AAAAAAAAO2k/fY_N40EBXaQ/s400/interest+rates.png" //a The benchmark central bank interest rate in the Czech Republic is currently 1.25%.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SoRargN8UAI/AAAAAAAAO2M/ftLhTpECOzk/s1600-h/interest+rates.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 227px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369516359161761794" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SoRargN8UAI/AAAAAAAAO2M/ftLhTpECOzk/s400/interest+rates.png" //abr /The benchmark central bank interest rate in Romania is currently 8.5%.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SoqlppeIUVI/AAAAAAAAO3c/1JceL9sFlgA/s1600-h/Hungary+interest+rates.png"img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 243px;" src="http://3.bp.blogspot.com/_ngczZkrw340/SoqlppeIUVI/AAAAAAAAO3c/1JceL9sFlgA/s400/Hungary+interest+rates.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5371287640518185298" //abr /br /The benchmark central bank interest rate in Hungary is currently 8.5%.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SoRVYsx4VPI/AAAAAAAAO1U/0iLZzJQLp4I/s1600-h/Hungary+interest+rates.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 245px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369510538558067954" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SoRVYsx4VPI/AAAAAAAAO1U/0iLZzJQLp4I/s400/Hungary+interest+rates.png" //a /pdiv class="blogger-post-footer"img width='1' height='1' src='https://blogger.googleusercontent.com/tracker/1443720106009957151-5389241844369313033?l=easterneuropeeconomy.blogspot.com' alt='' //div]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/from-original-sin-to-the-eternal-triangle-lessons-from-central-europe-2/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Do NOT Try This At Home: Which Country is the Worlds Most Dangerous?</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/do-not-try-this-at-home-which-country-is-the-worlds-most-dangerous/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/do-not-try-this-at-home-which-country-is-the-worlds-most-dangerous/#comments</comments>
		<pubDate>Tue, 11 Aug 2009 23:43:57 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Asia]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Market Commentary]]></category>
		<category><![CDATA[Russia]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.19765</guid>
		<description><![CDATA[Personally, when I think of the Worlds Most Dangerous Places, I think of Robert Young Pelton, whose approach to off-the-beaten-path travel saved my life more times than I care to count during the early reckless years of my youth. David...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/do-not-try-this-at-home-which-country-is-the-worlds-most-dangerous/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>&#8220;Advances in Development Reverse Fertility Declines&#8221; &#8211; Science or Hocus Pocus?</title>
		<link>http://www.straightstocks.com/investing-lessons/advances-in-development-reverse-fertility-declines-science-or-hocus-pocus-2/</link>
		<comments>http://www.straightstocks.com/investing-lessons/advances-in-development-reverse-fertility-declines-science-or-hocus-pocus-2/#comments</comments>
		<pubDate>Sun, 09 Aug 2009 08:29:00 +0000</pubDate>
		<dc:creator>Edward Hugh</dc:creator>
				<category><![CDATA[Economics]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Australia]]></category>
		<category><![CDATA[Austria]]></category>
		<category><![CDATA[Belgium]]></category>
		<category><![CDATA[Canada]]></category>
		<category><![CDATA[child mortality]]></category>
		<category><![CDATA[demographic processes]]></category>
		<category><![CDATA[demographic transition]]></category>
		<category><![CDATA[Denmark]]></category>
		<category><![CDATA[Eastern Europe]]></category>
		<category><![CDATA[eastern europe economy watch]]></category>
		<category><![CDATA[fertility]]></category>
		<category><![CDATA[Finland]]></category>
		<category><![CDATA[France]]></category>
		<category><![CDATA[Francesco Billari]]></category>
		<category><![CDATA[Germany]]></category>
		<category><![CDATA[Greece]]></category>
		<category><![CDATA[Hans Peter Kohler]]></category>
		<category><![CDATA[HDI]]></category>
		<category><![CDATA[human biology]]></category>
		<category><![CDATA[Iceland]]></category>
		<category><![CDATA[Ireland]]></category>
		<category><![CDATA[israel]]></category>
		<category><![CDATA[Italy]]></category>
		<category><![CDATA[Japan]]></category>
		<category><![CDATA[Luxembourg]]></category>
		<category><![CDATA[Netherlands]]></category>
		<category><![CDATA[New Zealand]]></category>
		<category><![CDATA[Norway]]></category>
		<category><![CDATA[Postponement]]></category>
		<category><![CDATA[prestigious journal]]></category>
		<category><![CDATA[reproductive effort]]></category>
		<category><![CDATA[sorry saga]]></category>
		<category><![CDATA[south korea]]></category>
		<category><![CDATA[Spain]]></category>
		<category><![CDATA[Sweden]]></category>
		<category><![CDATA[Switzerland]]></category>
		<category><![CDATA[technology correspondent]]></category>
		<category><![CDATA[tempo]]></category>
		<category><![CDATA[TFR]]></category>
		<category><![CDATA[Tfrs]]></category>
		<category><![CDATA[The Netherlands]]></category>
		<category><![CDATA[UK]]></category>
		<category><![CDATA[United Kingdom]]></category>
		<category><![CDATA[United States]]></category>
		<category><![CDATA[US]]></category>

		<guid isPermaLink="false">tag:blogger.com,1999:blog-1443720106009957151.post-2309368116947906883</guid>
		<description><![CDATA[According to a once-upon-a-time post on the Economist's a href="http://www.economist.com/blogs/certainideasofeurope/2007/07/a_fistful_of_reply.cfm#list-comments"Certain Ideas of Europe Blog/a Edward Hugh “was very cross” about some of the journalism they were serving up over at that prestigious journal. Well, not to worry, since this time he is hopping mad. And the issue which lies behind his wrath is essentially the same one, how to interpret and understand the demographic processes which are currently so evidently affecting our societies. In what is simply the latest episode in a long and sorry saga (if you want documentation, please see the comments Claus Vistesen and I nailed to their "Wall" in the above linked post) this week's print issue contains a href="http://www.economist.com/sciencetechnology/displaystory.cfm?story_id=14164483"a research review from their science and technology correspondent/a who is evidently not backward in coming forward with headline grabbing claims. According to the said corresponedent the demographic transition (a process which has been ongoing for over two hundred years now) has finally and definitively gone into reverse gear:br /blockquote"One of the paradoxes of human biology is that the rich world has fewer children than the poor world. In most species, improved circumstances are expected to increase reproductive effort, not reduce it, yet as economic development gets going, country after country has experienced what is known as the demographic transition: fertility (defined as the number of children borne by a woman over her lifetime) drops from around eight to near one and a half. That number is so small that even with the reduced child mortality which usually accompanies development it cannot possibly sustain the population.br /br /If Mikko Myrskyla of the University of Pennsylvania and his colleagues are correct, though, things might not be quite as bad as that. A study they have just published in Nature suggests that as development continues, the demographic transition goes into reverse."/blockquotebr /br /Well quite a strong claim is being made here. The idea that a group of researchers have come up with a finding that shows the "rule....that people have fewer children as their countries get richer...no longer holds true" is certainly not one to be sniffed at. Such a strong claim needs some very heavy backing you would think, given all the research that has gone into the topic in recent years.br /br /In fact, the research makes no such direct claim, since Myrskylä et al simply find statistically significant evidence for a reversal in the relationship between the human development index (HDI)br /and the total fertility rate (Tfr) at HDI levels around 0.85–0.9. The rest is only interpretation. As we will see, to move from a simple statististical correlation to formulating a hypothesis you need an explanatory framework, and you need to be able to make falsifiable predictions. The Nature letter from Myrskylä et al is far from being at this stage of development. They have simply found an interesting correlation, and the rest is in the eye of the observer.br /br /blockquote"Back in 1975, a graph plotting fertility rate against the Human Development Index fell as the Human Development Index rose. By 2005, though, the line had a kink in it. Above an HDI of 0.9 or so, it turned up, producing what is known in the jargon as a “J-shaped” curve (even though it is the mirror image of a letter J). As the chart shows, in many countries with really high levels of development (around 0.95) fertility rates are now approaching two children per woman. There are exceptions, notably Canada and Japan, but the trend is clear."/blockquotebr /br /However, according to the Economist the trend is clear. But is it? Edward has been doing some digging.br /br /In fact the problem goes beyond the Economist, since the source behind the article is a letter published in Nature. Below a href="http://www.nature.com/nature/journal/v460/n7256/full/nature08230.html"you can read that letter/a.br /br /blockquote"During the twentieth century, the global population has gone through unprecedented increases in economic and social development that coincided with substantial declines in human fertility and population growth rates. The negative association of fertility with economic and social development has therefore become one of the most solidly established and generally accepted empirical regularities in the social sciences. As a result of this close connection between development and fertility decline, more than half of the global population now lives in regions with below-replacement fertility (less than 2.1 children per woman. In many highly developed countries, the trend towards low fertility has also been deemed irreversible. Rapid population ageing, and in some cases the prospect of significant population decline, have therefore become a central socioeconomic concern and policy challenge10. Here we show, using new cross-sectional and longitudinal analyses of the total fertility rate and the human development index (HDI), a fundamental change in the well-established negative relationship between fertility and development as the global population entered the twenty-first century. Although development continues to promote fertility decline at low and medium HDI levels, our analyses show that at advanced HDI levels, further development can reverse the declining trend in fertility. The previously negative development–fertility relationship has become J-shaped, with the HDI being positively associated with fertility among highly developed countries. This reversal of fertility decline as a result of continued economic and social development has the potential to slow the rates of population ageing, thereby ameliorating the social and economic problems that have been associated with the emergence and persistence of very low fertility."/blockquotebr /br /br /Here is the chart (reproduce from Nature data) which the Economist presents to illustrate the 'J curve' relationship.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/Sn1c5QH2KJI/AAAAAAAAOw8/9EElMH7Rg3w/s1600-h/Nature+Chart.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 252px; DISPLAY: block; HEIGHT: 277px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5367548469545674898" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Sn1c5QH2KJI/AAAAAAAAOw8/9EElMH7Rg3w/s400/Nature+Chart.png" //abr /br /Nice, isn't it? Nature even go to the lengths of a putting up a special "event" podcast featuring an interview with Hans Peter Kohler (a href="http://www.nature.com/nature/podcast/"click here for link/a) as if to underline the importance of the "finding") But does any of this have any compelling validity?br /br /Methinks not as much as the authors of the letter, or those who are covering it in the media, are trying to make out. There are many issues which are raised here, but I would just like to mention three.br /br /The first is the decision of the research team to work with a period based fertility measure which is known to be very unreliable for "tempo" reasons (the Total Fertility Rate- Tfr) as the basis for a longitudinal study. And let us remember, the authors only really claim to have found a correlation between HDI levels in the 0.85–0.9 range and movements in the Tfr, and there could be many explanations for this. Indeed the authors themselves even offer one of them in their supplementary information - "countries at development levels near the critical level HDI = 0.86 might have a more rapid postponement of childbearing than more advanced countries.. " - a possibility which, in fairness to the authors, they try to test for.br /br /And you don't have to rely on me for the suggestion that the Tfr is hardly the most desireable measure for what they want to do, since the authors themselves point this very fact out in the supplementary information (and the only thing which surprises me is that nobody else who has reviewed the research seems to have twigged the implications of this). So the very title of the Letter is totally misleading, they have not found that "Advances in Development Reverse Fertility Declines" -since in the first place the direction of causality is not adequately determined (it might be that reverses in fertility decline advance development, as I try to show in a piece referenced below) and in any event the research only shows movements in the HDI correlate with movements in the Tfr (and not with "fertility").br /br /blockquoteThe recent literature on low fertility in developed countries has pointed to the important role of delayed childbearing, that is, the ongoing postponement of childbearing to increasingly later ages. In the context of this paper, delayed childbearing is potentially important because the postponement of childbearing can distort the total fertility rate as a measure of the quantum (or long-term level) of fertility. “Tempo effects”, or the reductions in the total fertility rate resulting from a postponement of childbearing, have been shown to partially explain the very low fertility rates observed in some European countries./blockquotebr /br /So this is the first issue. Due to the phenomenon of birth postponement, the Tfr is a hopelessly unreliable indicator, and what is often called "the birth recovery" is in fact a statistical issue produced by the fact that the Tfr first sinks to very low levels (the birth dearth) and then recovers as women reach the new (higher) childbearing age. Since all of this is simply so obvious, I am absolutely astounded that two such well known and highly respected demographers - Hans-Peter Kohler and Francesco Billari - have placed their name on a piece of research that could almost be described as a publicity stunt. I am even more astounded by the way Nature appear to have been hoodwinked.br /br /Basically, I don't think that there can be any doubt that if they used a more comprehensive measure of fertility - say completed cohort fertility - they wouldn't get the correlation they claim to have found, since CFRs never fell so low, and have not bounced back in the same way. This is essentially because this indicator removes the temporal component found in the TFR (older first birth ages among women in developed societies) and only focuses on quantity. True, they did carry out a robustness test using an adjusted Tfr, but the results are much weaker, and the sample far from satisfactory (at least for the claims being made), and the authors well know this (see below).br /br /In their longitudinal study the authors look at Tfrs for a number of countries over the period 1975 to 2005 and compare these to the lowest Tfr reading observed while a country's HDI was within the 0.85–0.9 window. For all countries considered, the HDI in 2005 was found to be higher than the HDI in the reference year. For 18 of the 26 countries that attained a HDI 0.9 by 2005, the Tfr in 2005 was found to be higher than the TFR in the reference year. As I say, this is hardly surprising, given the tempo impact on Tfrs. The "2005 18" are Norway, the Netherlands, the United States, Denmark, Germany, Spain, Belgium, Luxembourg, Finland, Israel, Italy, Sweden, France, Iceland, the United Kingdom, New Zealand, Greece and Ireland.br /br /Perhaps it is more surprising (and interesting) to learn that they found six countries where the HDI was over 0.9 but where the Tfrs didn't pick up: Japan, Austria, Australia, Switzerland, Canada and South Korea. Clearly the absence of "rebound" in even the Tfrs is something of a cause for preoccupation in these countries, and examining the background to what is happening in these countries could at the end of the day turn this research into something quite interesting. That is to say, if for their level of development we might have expected the tempo effect to be more or less over, why do some countries continue to have very low fertility levels?br /br /Basically, to shoot a hole straight through their hypothesis (falsify it that is, surely in science things should be falsifiable), I would say it is only necessary to find a significant number of countries in the first group where fertility as measured by a better indicator didn't rise. Unfortunately we don't have a really good time series for such an indicator, but Eurostat have published statistical estimates for Completed Cohort Fertility Rates (Cfrs) for EU countries up to the 1989 cohort. That is, estimates of what fertility is likely to be for women who were 30 in 2009. Looking at this data, the following countries would appear to offer no evidence whatever for a rebound in cohort fertility in what we know to dat: Norway, Netherlands, Denmark, Germany, Italy, Finland, Sweden, France, Iceland, the UK, Greece and Ireland. That is to say, as far as I am concerned, the whole hypothesis falls till at least subsequent data confirm it.br /br /I haven't been able to check foir the US (but the Cfr is probably up) Israel (also) or New Zealand. Belgium has little available data. So the only two European countries which you could say with some degree of security actually could confirm the hypothesis would be Luxembourg and Spain - but if you just look at the increases in Spain - from 1.34 to 1.35 - and think about the fact that 5 million new migrants arrived (mainly in childbearing ages) between 2000 and 2009, then the result is hardly dramatic, and if you look what just happened to the economy, it is more than likely that GDP per capita is plummeting, and and household income (which has a weighting of more than one third in the HDI) with it. Which brings me to the second question, the reference year. But before I move on to that, as I say above, the authors are perfectly well aware of the issue with using Tfrs.br /blockquoteIn particular, one could speculate that tempo effects might be—at least partially—responsible for the observed change in the development–fertility association. For example, countries at development levels near the critical level HDIcrit = 0.86 might have a more rapid postponement of childbearing than more advanced countries. If this were the case, tempo effects would reduce the TFR more strongly at intermediate than at advanced HDI levels, and the positive association between HDI and TFR in Figures 1–2 could be partially explained by differences in the pace of fertility postponement, rather than by variation in levels among advanced countries./blockquotebr /br /The authors therefore carry out a robustness test which effectively amounts to a cross-sectional study (cross-sectional note, not longitudinal) of the relationship between the total fertility rate with and without adjustment for tempo effects, and the human development index in 1975 and 2005. Tempo adjusted TFRs are not available over the period in question so they simply took data for 2005 (for those countries for which it is available from the ’European Demographic Data Sheet 2008’ (published by the Vienna Institute of Demography, Vienna, Austria) and from McDonald P, Kippen R. The Intrinsic Total Fertility Rate: A New Approach to the Measurement of Fertility (Population Association of America Annual Meeting 2007, New York, 2007). What they can then show is that the HDI–TFR relationship at persists at advanced development stages persists even after adjusting the total fertility rate for tempo effects. But, as I say, this is cross sectional, not longitudional. What does this jargon mean? It means there is no clear causal relationship, since equally it could be better HDIs which is driving better fertility, and hence you can use the HDI to explain differences between countries if you wish, but not the evolution of fertility in individual countries. The 2005 result is show as a black line in the chart below, where you can see that as HDI goes up, Tfr also seems to be higher.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/Sn1xBKpJlQI/AAAAAAAAOxE/GnOAvjVfEW4/s1600-h/cross+section.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 371px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5367570595746256130" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Sn1xBKpJlQI/AAAAAAAAOxE/GnOAvjVfEW4/s400/cross+section.png" //abr /br /Which is very much to the point, and brings me to my second issue, since in my blog post "Taking Solow Seriously - Does Neoclassical Steady State Growth Really Exist?" (a href="http://edwardhughtoo.blogspot.com/2009/06/taking-solow-seriously-does.html"which you can find here/a) - I demonstrate using a few simple charts that the evolution in GDP per capita (which accounts remember for one third of the HDI) may well be a function of underlying population dynamics, since three countries with stronger population growth and higher fertility (the US, the UK and France) evidently perform much better than three will low-to-negative population growth and very low fertility (Italy, Japan and Germany).br /br /Also, it should be remembered, as I mention, we need to think about base years. 2005 was the mid point of a massive and unsustainable asset and construction boom. I think there is little doubt that if we took 2010 or 2011, the results would be rather different.br /br /Finally, the piece in the Economist article that I personallyfind most interesting is the following:br /br /"Dr Myrskyla’s data, however, suggest the ultimate outcome of development may not be a collapsing population at all but, rather, the environmentalist’s nirvana of uncoerced zero population growth."br /br /I want to stress, I certainly think this stationary population idea is certainly one possibility in the more highly developed nations - but if we move to stationary populations, with higher and higher proportions of the population in the older age groups the result is - as we know - a rising median population age. It is the economic impact of the abrupt rise in median age that I personally am focused on, and how just this rise, and the resulting fall in living standards for many young people, might feedback in a negative way on fertility and thus produce ever more rising median ages. In recent days, some have been asking why people like myself are so focused on what is going on in Latvia, which is after all, a pretty small country. Well, I think here in the issues raised by the Nature letter we have just one more reason why that country is important, since in a sense it is conducting a "live" experiment.br /br /Finally, I want to say, none of the above should be read as suggesting that there isn't a great deal of interest and material to talk about in the study the authors have carried out. Nor would I hold them entirely responsible for the way in which others have used and abused their work. I just the reserach doesn't demonstrate what they want it to demonstrate, and that the study doesn't deserve the kind of high media profile it has been receiving, since it is going to mislead the general public more than it will enlighten them, given the important methodological issue which are still to be clarified.br /br /The heart of the problem is twofold. The excessive reliance on a rather problematic indicator (the Tfr) and the causality issue when it comes to GDP per capita and higher fertility (which way does the arrow point?). In fairness the authors do attempt to construct their own combined time series based on a mixture of tempo-adjusted Tfrs and Tfrs, a procedure which seems at the very least to be somewhat problematic if you want to reverse fifty years of academic consensus. And they do get the same sort of result, but the outcome is much weaker and is based on a much smaller sample of only 25 countries. But even this result is at the very least odd, since, as I argue above, cohort fertility hasn't really increased in most of thecountries concerned. So I think we really all need to see more details of how the authors actually constructed the time series to be able to form a better judgement.br /br /But all this being said, and whatever the original intentions of the authors, serious scientific debate does seem to have been turned here into something of a media circus. Wasn't it blogs that were supposed to do that?br /br /strongAppendix/strongbr /br /Below I offer a series of charts showing estimated completed cohort fertility rates based on data compiled by Eurostat using the distribution of births by parity (first and second or higher order births) and mean age of mothers at respective parities to carry out the calculations. Evidently, the most recent data for hard data on completed cohort fertility comes for the 1960 - 1965 cohort. These charts should not be treated as hard data, but a rule-of-thumb type quick visual inspection suggests that it is hard to accept the case for a substantial fertility rebound in many European countries.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/Sn3PO8BEe7I/AAAAAAAAOx8/9eOvojQ9XYQ/s1600-h/Switzerland+and+Slovenia.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 203px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5367674186431232946" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Sn3PO8BEe7I/AAAAAAAAOx8/9eOvojQ9XYQ/s400/Switzerland+and+Slovenia.png" //abr /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/Sn3PJ0CFCQI/AAAAAAAAOx0/yu_FnUR5KkM/s1600-h/norway+and+denmark.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 203px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5367674098388633858" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/Sn3PJ0CFCQI/AAAAAAAAOx0/yu_FnUR5KkM/s400/norway+and+denmark.png" //abr /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/Sn3PGVm-g8I/AAAAAAAAOxs/1jEqYkUYjqE/s1600-h/netherlands+and+Italy.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 201px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5367674038682289090" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Sn3PGVm-g8I/AAAAAAAAOxs/1jEqYkUYjqE/s400/netherlands+and+Italy.png" //abr /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/Sn3PCbmMTYI/AAAAAAAAOxk/6BPfKQPDsIc/s1600-h/luxembourg+and+spain.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 203px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5367673971570134402" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Sn3PCbmMTYI/AAAAAAAAOxk/6BPfKQPDsIc/s400/luxembourg+and+spain.png" //abr /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/Sn3O-cYGe_I/AAAAAAAAOxc/ktZadAXfAaU/s1600-h/ireland+and+Greece.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 204px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5367673903059991538" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Sn3O-cYGe_I/AAAAAAAAOxc/ktZadAXfAaU/s400/ireland+and+Greece.png" //abr /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/Sn3O6b_brlI/AAAAAAAAOxU/eGWratutFCw/s1600-h/Iceland+and+Sweden.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 201px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5367673834237046354" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/Sn3O6b_brlI/AAAAAAAAOxU/eGWratutFCw/s400/Iceland+and+Sweden.png" //abr /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/Sn3O2NEgbvI/AAAAAAAAOxM/sfcSNnQpjQc/s1600-h/finland+and+germany.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 202px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5367673761512320754" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/Sn3O2NEgbvI/AAAAAAAAOxM/sfcSNnQpjQc/s400/finland+and+germany.png" //adiv class="blogger-post-footer"img width='1' height='1' src='https://blogger.googleusercontent.com/tracker/1443720106009957151-2309368116947906883?l=easterneuropeeconomy.blogspot.com' alt='' //div]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/advances-in-development-reverse-fertility-declines-science-or-hocus-pocus-2/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Turkey&#8217;s Geostrategic Energy Role</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/turkeys-geostrategic-energy-role/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/turkeys-geostrategic-energy-role/#comments</comments>
		<pubDate>Fri, 07 Aug 2009 14:47:29 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Market Commentary]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Ali Babacan]]></category>
		<category><![CDATA[Ankara]]></category>
		<category><![CDATA[Armenia]]></category>
		<category><![CDATA[Azerbaijan]]></category>
		<category><![CDATA[Baku]]></category>
		<category><![CDATA[Black Sea]]></category>
		<category><![CDATA[Blue Stream gas pipeline]]></category>
		<category><![CDATA[Blue Stream;]]></category>
		<category><![CDATA[Bosporus Straits]]></category>
		<category><![CDATA[Bulgaria]]></category>
		<category><![CDATA[Burgas-Alexandroupolis pipeline]]></category>
		<category><![CDATA[Caucasus]]></category>
		<category><![CDATA[central Asia]]></category>
		<category><![CDATA[Chess]]></category>
		<category><![CDATA[Commentator]]></category>
		<category><![CDATA[considerable energy supply jitters]]></category>
		<category><![CDATA[controlled energy transit route]]></category>
		<category><![CDATA[Council On Foreign Relations]]></category>
		<category><![CDATA[crude oil]]></category>
		<category><![CDATA[Dick Cheney]]></category>
		<category><![CDATA[Dmitry Medvedev]]></category>
		<category><![CDATA[downstream energy sector]]></category>
		<category><![CDATA[energy]]></category>
		<category><![CDATA[energy alliance]]></category>
		<category><![CDATA[energy competition]]></category>
		<category><![CDATA[energy corridor]]></category>
		<category><![CDATA[energy diplomacy]]></category>
		<category><![CDATA[Energy Minister]]></category>
		<category><![CDATA[energy observers]]></category>
		<category><![CDATA[energy policies]]></category>
		<category><![CDATA[Energy Policy]]></category>
		<category><![CDATA[energy preferences]]></category>
		<category><![CDATA[Energy Projects]]></category>
		<category><![CDATA[energy relations]]></category>
		<category><![CDATA[energy supply]]></category>
		<category><![CDATA[European Union]]></category>
		<category><![CDATA[Foreign Minister]]></category>
		<category><![CDATA[gas pipeline]]></category>
		<category><![CDATA[gas storage hub]]></category>
		<category><![CDATA[Gazprom]]></category>
		<category><![CDATA[Georgia]]></category>
		<category><![CDATA[Georgian military]]></category>
		<category><![CDATA[Greece]]></category>
		<category><![CDATA[guarantee energy security]]></category>
		<category><![CDATA[Ilham Aliyev]]></category>
		<category><![CDATA[israel]]></category>
		<category><![CDATA[Italy]]></category>
		<category><![CDATA[Justice and Development Party]]></category>
		<category><![CDATA[Kazakhstan]]></category>
		<category><![CDATA[Kurdish separatist group]]></category>
		<category><![CDATA[Mediterranean]]></category>
		<category><![CDATA[Mediterranean Sea;]]></category>
		<category><![CDATA[Middle East]]></category>
		<category><![CDATA[Moscow]]></category>
		<category><![CDATA[Natural Gas]]></category>
		<category><![CDATA[natural gas distribution infrastructure]]></category>
		<category><![CDATA[natural gas oligopoly]]></category>
		<category><![CDATA[Near East]]></category>
		<category><![CDATA[North Atlantic Treaty Organization]]></category>
		<category><![CDATA[Oil]]></category>
		<category><![CDATA[oil  and gas pipelines]]></category>
		<category><![CDATA[Oil Exports]]></category>
		<category><![CDATA[oil pipeline]]></category>
		<category><![CDATA[Oil Supply]]></category>
		<category><![CDATA[PKK]]></category>
		<category><![CDATA[player]]></category>
		<category><![CDATA[preferential energy supply routes]]></category>
		<category><![CDATA[president]]></category>
		<category><![CDATA[Prime Minister]]></category>
		<category><![CDATA[Recep Tayyip Erdogan]]></category>
		<category><![CDATA[Robert Amsterdam]]></category>
		<category><![CDATA[Russian Navy]]></category>
		<category><![CDATA[Sinan Ogan]]></category>
		<category><![CDATA[South Stream;]]></category>
		<category><![CDATA[Tbilisi]]></category>
		<category><![CDATA[Turkey]]></category>
		<category><![CDATA[Turkey-Greece-Italy pipeline]]></category>
		<category><![CDATA[Turkish straits]]></category>
		<category><![CDATA[Turkmenistan]]></category>
		<category><![CDATA[Ukraine]]></category>
		<category><![CDATA[United States]]></category>
		<category><![CDATA[urban gas grids]]></category>
		<category><![CDATA[USD]]></category>
		<category><![CDATA[Vice President]]></category>
		<category><![CDATA[Washington]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.19714</guid>
		<description><![CDATA[Given all the news this week of Russia and Italy's South Stream deal with Turkey in exchange for a nuclear power plant, I thought I would repost an article written by Robert Amsterdam last fall in Energy Risk on Turkey's...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/turkeys-geostrategic-energy-role/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Russia as the Engine of British Energy Intervention</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/russia-as-the-engine-of-british-energy-intervention/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/russia-as-the-engine-of-british-energy-intervention/#comments</comments>
		<pubDate>Wed, 05 Aug 2009 15:08:25 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Market Commentary]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Algeria]]></category>
		<category><![CDATA[Britain]]></category>
		<category><![CDATA[Department of Energy]]></category>
		<category><![CDATA[Electricity]]></category>
		<category><![CDATA[energy]]></category>
		<category><![CDATA[Energy Minister]]></category>
		<category><![CDATA[gas supplies]]></category>
		<category><![CDATA[Gordon Brown]]></category>
		<category><![CDATA[Malcolm Wicks]]></category>
		<category><![CDATA[minister]]></category>
		<category><![CDATA[Nigeria]]></category>
		<category><![CDATA[special representative for international energy issues]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.19685</guid>
		<description><![CDATA[So much fuss was raised over the comments made by Joe Biden about Russia a few weeks back, as suddenly so many of his political opponents were concerned about hurting the feelings of the besieged siloviki or the derailment of...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/russia-as-the-engine-of-british-energy-intervention/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Baltic Pain</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/baltic-pain/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/baltic-pain/#comments</comments>
		<pubDate>Tue, 04 Aug 2009 11:41:24 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Market Commentary]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Baltics]]></category>
		<category><![CDATA[Brussels]]></category>
		<category><![CDATA[Commission of European Communities;]]></category>
		<category><![CDATA[Latvia]]></category>
		<category><![CDATA[Riga]]></category>
		<category><![CDATA[Vilnius]]></category>
		<category><![CDATA[Western Europe]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.19667</guid>
		<description><![CDATA[Gideon Rachman's column in the Financial Times focuses on the ongoing economic troubles in the Baltics - and the threat it poses to European and Russian recovery.The economic downturns in the region are shocking. Last week, Lithuania announced that its...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/baltic-pain/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>The Moldovan Kingmaker</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/the-moldovan-kingmaker/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/the-moldovan-kingmaker/#comments</comments>
		<pubDate>Mon, 03 Aug 2009 12:34:58 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Market Commentary]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[China]]></category>
		<category><![CDATA[EUR]]></category>
		<category><![CDATA[Gbp]]></category>
		<category><![CDATA[head of state]]></category>
		<category><![CDATA[International Monetary Fund]]></category>
		<category><![CDATA[Lupu]]></category>
		<category><![CDATA[Moldova]]></category>
		<category><![CDATA[North Atlantic Treaty Organization]]></category>
		<category><![CDATA[president]]></category>
		<category><![CDATA[USD]]></category>
		<category><![CDATA[Voronin]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.19653</guid>
		<description><![CDATA[The Financial Times has an interesting piece about the former Moldovan Communist Party leader Marian Lupu, who is playing a central role in the current events in Chisinau.&#160; Lupu will essentially be the main coordinator of whatever political alliance able...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/the-moldovan-kingmaker/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>What a Failed Georgia Means for Europe</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/what-a-failed-georgia-means-for-europe/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/what-a-failed-georgia-means-for-europe/#comments</comments>
		<pubDate>Fri, 31 Jul 2009 14:08:38 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Asia]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Market Commentary]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[André Glucksmann]]></category>
		<category><![CDATA[City Journal;]]></category>
		<category><![CDATA[Georgia]]></category>
		<category><![CDATA[Germany]]></category>
		<category><![CDATA[inflammatory media rhetoric]]></category>
		<category><![CDATA[Mikhail Khodorkovsky]]></category>
		<category><![CDATA[military specialist]]></category>
		<category><![CDATA[Moscow]]></category>
		<category><![CDATA[OSCE]]></category>
		<category><![CDATA[Pavel Felgenhauer]]></category>
		<category><![CDATA[Poland]]></category>
		<category><![CDATA[Putin]]></category>
		<category><![CDATA[Russian Army]]></category>
		<category><![CDATA[Tbilisi]]></category>
		<category><![CDATA[UN Security Council]]></category>
		<category><![CDATA[United Nations]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.19628</guid>
		<description><![CDATA[The French philosopher André Glucksmann has been one of Europe's most outspoken advocates in support of liberty of Russian political prisoners, such as Mikhail Khodorkovsky.&#160; Here in City Journal is a translation of a thought piece by Glucksmann relating to...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/what-a-failed-georgia-means-for-europe/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Moldova&#8217;s Anti-Climatic Election</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/moldovas-anti-climatic-election/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/moldovas-anti-climatic-election/#comments</comments>
		<pubDate>Thu, 30 Jul 2009 19:10:42 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Market Commentary]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Commission of European Communities;]]></category>
		<category><![CDATA[energy supplies]]></category>
		<category><![CDATA[Moldova]]></category>
		<category><![CDATA[Moscow]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.19620</guid>
		<description><![CDATA[As readers are likely aware, things are more or less the same in Chisinau following the hotly contested and flawed election.&#160; The opposition to Vladimir Voronin and the Communist Party gained 53 seats in the parliament, which is enough to...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/moldovas-anti-climatic-election/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Sovereign Subprime Lending Is Officially In The House</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/sovereign-subprime-lending-is-officially-in-the-house/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/sovereign-subprime-lending-is-officially-in-the-house/#comments</comments>
		<pubDate>Wed, 29 Jul 2009 20:56:59 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Asia]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Market Commentary]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Africa]]></category>
		<category><![CDATA[China]]></category>
		<category><![CDATA[China Overseas Engineering Group]]></category>
		<category><![CDATA[Chinese Embassy]]></category>
		<category><![CDATA[Chisinau;]]></category>
		<category><![CDATA[Executive]]></category>
		<category><![CDATA[Ghana]]></category>
		<category><![CDATA[local mining executive]]></category>
		<category><![CDATA[Moldova]]></category>
		<category><![CDATA[Monty Python;]]></category>
		<category><![CDATA[Moscow]]></category>
		<category><![CDATA[Taiwan]]></category>
		<category><![CDATA[The Wall Street Journal]]></category>
		<category><![CDATA[United Nations High Commissioner for Refugees]]></category>
		<category><![CDATA[USD]]></category>
		<category><![CDATA[Voronin]]></category>
		<category><![CDATA[Voronin's government]]></category>
		<category><![CDATA[Wall Street Journal]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.19600</guid>
		<description><![CDATA[During a business trip to Ghana last year, I got into a casual conversation at one point with a local mining executive about the West-vs.-China dynamic when it comes to thinking about the intersection of business, politics and development aid...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/sovereign-subprime-lending-is-officially-in-the-house/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>EuroParl Greens Denounce Russia&#8217;s Human Rights after Kulagin Murder</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/europarl-greens-denounce-russias-human-rights-after-kulagin-murder/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/europarl-greens-denounce-russias-human-rights-after-kulagin-murder/#comments</comments>
		<pubDate>Tue, 28 Jul 2009 16:38:52 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Market Commentary]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Commission of European Communities;]]></category>
		<category><![CDATA[european commission]]></category>
		<category><![CDATA[European Free Alliance]]></category>
		<category><![CDATA[European Parliament]]></category>
		<category><![CDATA[European Union]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.19586</guid>
		<description><![CDATA[This press release comes from the website of the Greens of the European Free Alliance on the European Parliament: The murder of Andrei Kulagin, activist for human rights organisation Spravedlivost (Justice), has been announced by authorities more than two months...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/europarl-greens-denounce-russias-human-rights-after-kulagin-murder/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Prieur’s readings (July 27, 2009)</title>
		<link>http://www.straightstocks.com/investing-in-china/prieur%e2%80%99s-readings-july-27-2009/</link>
		<comments>http://www.straightstocks.com/investing-in-china/prieur%e2%80%99s-readings-july-27-2009/#comments</comments>
		<pubDate>Mon, 27 Jul 2009 06:46:22 +0000</pubDate>
		<dc:creator>Prieur du Plessis</dc:creator>
				<category><![CDATA[China]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Market Commentary]]></category>
		<category><![CDATA[Alan Blinder]]></category>
		<category><![CDATA[America]]></category>
		<category><![CDATA[Banking]]></category>
		<category><![CDATA[Barry Eichengreen]]></category>
		<category><![CDATA[Congress]]></category>
		<category><![CDATA[Economist]]></category>
		<category><![CDATA[Federal Reserve System]]></category>
		<category><![CDATA[Financial Times]]></category>
		<category><![CDATA[Floyd Norris;]]></category>
		<category><![CDATA[Hussman Funds]]></category>
		<category><![CDATA[Independent Institute;]]></category>
		<category><![CDATA[investment postcards]]></category>
		<category><![CDATA[James Barty]]></category>
		<category><![CDATA[John Hussman]]></category>
		<category><![CDATA[John Makin;]]></category>
		<category><![CDATA[Long road]]></category>
		<category><![CDATA[myopia]]></category>
		<category><![CDATA[Philip Stephens;]]></category>
		<category><![CDATA[Robert Higgs;]]></category>
		<category><![CDATA[Samuel Brittan;]]></category>
		<category><![CDATA[the New York Times]]></category>
		<category><![CDATA[The Wall Street Journal]]></category>
		<category><![CDATA[United States]]></category>
		<category><![CDATA[USD]]></category>
		<category><![CDATA[Wall Street Journal]]></category>
		<category><![CDATA[Wolfgang Munchau]]></category>

		<guid isPermaLink="false">http://www.investmentpostcards.com/?p=9225</guid>
		<description><![CDATA[This post provides links to a number of thought-provoking articles I have read over the past few days that you may also find interesting.]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-china/prieur%e2%80%99s-readings-july-27-2009/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Escaping Original Sin in Hungary?</title>
		<link>http://www.straightstocks.com/investing-lessons/escaping-original-sin-in-hungary/</link>
		<comments>http://www.straightstocks.com/investing-lessons/escaping-original-sin-in-hungary/#comments</comments>
		<pubDate>Thu, 23 Jul 2009 20:37:00 +0000</pubDate>
		<dc:creator>Edward Hugh</dc:creator>
				<category><![CDATA[Economics]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[amazon]]></category>
		<category><![CDATA[Claus Vistesen]]></category>
		<category><![CDATA[Copenhagen]]></category>
		<category><![CDATA[currency loans]]></category>
		<category><![CDATA[Debt]]></category>
		<category><![CDATA[Eastern Europe]]></category>
		<category><![CDATA[eastern europe economy watch]]></category>
		<category><![CDATA[Eastern European]]></category>
		<category><![CDATA[Escape;]]></category>
		<category><![CDATA[foreign currencies]]></category>
		<category><![CDATA[href]]></category>
		<category><![CDATA[Hungary]]></category>
		<category><![CDATA[international capital markets]]></category>
		<category><![CDATA[international economics]]></category>
		<category><![CDATA[Maurice]]></category>
		<category><![CDATA[Maurice Obstfeld;]]></category>
		<category><![CDATA[Minister Peter Oszko]]></category>
		<category><![CDATA[onmouseover]]></category>
		<category><![CDATA[Paul Krugman]]></category>
		<category><![CDATA[return]]></category>
		<category><![CDATA[Romania]]></category>
		<category><![CDATA[SIN]]></category>
		<category><![CDATA[U.S]]></category>
		<category><![CDATA[Western European]]></category>
		<category><![CDATA[western european banks]]></category>

		<guid isPermaLink="false">tag:blogger.com,1999:blog-1443720106009957151.post-2694970821999958886</guid>
		<description><![CDATA[by Claus Vistesen: Copenhagenbr /br /According to a href="http://www.amazon.com/International-Economics-MyEconLab-1-semester-Student/dp/0321488830"the well known textbook in international economics/a by Maurice Obstfeld and Paul Krugman [1] the notion of original sin refers to the fact that many developing economies are not able to borrow in their own currencies but are forced to denominate large parts of their sovereign debt in order to attract capital from foreign investors. The argument then goes that if and when the goings get tough those countries will face difficulties paying off their liabilities and once the dust have settled the sin, as it were, has only become more binding when these same economies yet again venture onto international capital markets.p/p pIt is interesting to ponder this story in relation to Eastern Europe where far from being a sin the ability to denominate liabilities in foreign currencies such as Euros and Swiss Francs was almost seen as a virtue of modern capital markets during the boom years which followed the famous meeting in Copenhagen which saw the European family expand to 25 countries, a number which now has risen to 27. On the face of it, it is not difficult to see where this virtue came from. Aggressive expansion by western European banks into the CEE and a low volatility environment ultimately driven by the notion of a road map towards convergence bound to bring forth an equalization in living standards and, in the case of many CE economies, a certain membership into the Eurozone underpinned the fact that the ability to shop foreign currency loans was hardly a sin, but a natural counter product of the newly formed European community./p pNow, all this has capsized and those economies who where so busy raising rates going into crisis in order to quell the massive inflationary pressures, which further intensified the flow of foreign currency loans, are now effectively stuck with no ability to tweak monetary policy since the low rates which are needed are either impossible (in the case of the Baltics and their Euro pegs) or de-facto impossible in the context of e.g. Hungary and Romania. Moreover, and in a world where major central banks are stuck at the zero bound and where the level of volatility may itself be volatile as we move from optimism to pessimism all that liquidity may yet again prove to be a destabilising factor in the context of Eastern Europe where we were all, I am sure, amazed, to learn a couple of months ago how some analysts were advising clients to play the carry trade with Eastern European economies as designated targets, for more on this see a href="http://clausvistesen.squarespace.com/alphasources-blog/2009/5/25/the-carry-trade-and-the-global-monetary-credit-transmission.html"this post/a. /p pSo what does all this has to do specifically with Hungary? Well, today we learned from Finance Minister Peter Oszko that Hungary would certainly prefer to issue local currency debt in the future, but given the fact that the IMF loan is not, by nature of it being a loan, permanent Hungary also need to find a viable way to make its policy tools work most effectively. The following excerpt is from Bloomberg;/p blockquote pHungary doesn’t plan to raise foreign-currency debt in the “near future” and will increase sales of forint-denominated bonds to finance the a onmouseover="return escape( popwQuoteShort( this, 'HUGBCBAL:IND' ))" href="http://www.bloomberg.com/apps/quote?ticker=HUGBCBAL%3AIND"budget/a, Finance Minister a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Peter+Oszkoamp;site=wnewsamp;client=wnewsamp;proxystylesheet=wnewsamp;output=xml_no_dtdamp;ie=UTF-8amp;oe=UTF-8amp;filter=pamp;getfields=wnnisamp;sort=date:D:S:d1"Peter Oszko/a told Nepszabadsag. “In the short term, the budget doesn’t need foreign- currency denominated financing sources,” Oszko said in an a onmouseover="return escape( popwOpenWebSite( this ))" href="http://nol.hu/gazdasag/20090723-ha_akarunk__ki_tudunk_menni_a_piacra" target="_blank"interview/a with the Budapest-based newspaper. The Finance Ministry has confirmed the comments to Bloomberg. “Increasing forint-based issuance is more worthwhile.”/p pHungary sold 1 billion euros ($1.42 billion) of debt last week in its first offering since the flight of investors forced it to take a 20 billion-euro bailout from the a onmouseover="return escape( popwOpenWebSite( this ))" href="http://imf.org/" target="_blank"International Monetary Fund/a, the European Union and World Bank in October. The country is working to wean itself off emergency financing. The IMF-led loan, which “secures a comfortable situation,” runs out in March 2010 and the government must work to ensure the country can finance itself from the market at lower rates by then, Oszko said./p p“The July auction’s primary importance wasn’t to secure financing but rather to strengthen confidence in the country,” Oszko said. A “smaller” foreign debt sale is possible in the future as “it’s our basic interest to be active in the market.” Hungary could next target U.S. investors with the sale of dollar-based bonds, the newspaper Napi Gazdasag reported today, citing a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Laszlo+Balassyamp;site=wnewsamp;client=wnewsamp;proxystylesheet=wnewsamp;output=xml_no_dtdamp;ie=UTF-8amp;oe=UTF-8amp;filter=pamp;getfields=wnnisamp;sort=date:D:S:d1"Laszlo Balassy/a, a Budapest-based executive at Citigroup Inc., which helped organize last week’s sale./p /blockquote pIt should immediately be clear that this represents the original sin issue in full vigour although somewhat in reverse one could argue. Consequently and notwithstanding the obvious problems facing Hungary in the context of lowering rates, the country needs to balance the between issuing debt in foreign currency which would mean further currency translation risk and an even further entrenchment of the high domestic interest rates or issuing in domestic currency which might not be possible at current rates (i.e. rates would need to go up further) or simply not viable given the future financing needs./p pTo put all this in the context of a solid macroeconomic analysis I am in luck since a href="http://globaleconomydoesmatter.blogspot.com/2009/07/hungary-struggles-to-apply-its-own.html"Edward has just dished out an up to date look at Hungary's economy/a. As Edward notes straight away, Hungary has now embarked on the great experiment also currently being tested in Latvia of internal devaluation and the long hard climb, through deflation, towards the competitiveness Hungary so badly needs. Now, I know that I tend to move closely together with Edward on many accounts but I dare anyone not to share the sentiment expressed by Edward as he points to the obvious point. The current strategy taken in Hungary to battle the crisis is emnot/em working and at some point one really has to stop to ask why./p pOne striking data point is the fact that while the real economy seems in absolute free fall real wages are still rising and given the inevitable point that Hungary needs wages to fall, and a lot, absent devaluation one wonders silently what kind of contractory jolt the real economy needs in order to engender this effect. Meanwhile, Hungary has also recently pulled out the good old trick of raising the VAT something which will surely to push up the main inflation index, once again pulling in the wrong direction./p pAs usual Edward is thorough, very thorough, and I can only suggest to spend the 20 minutes it takes to superficially digest his points. Especially the point about a monetary policy trap is mandatory reading. In terms of a summary of the situation the following gets to the heart of the matter;/p blockquote pAnd in case you had forgotten, here is what is happening to Hungarian GDP: while wages and prices are rising steadily, GDP is in free fall. Year on year it was down 4.7% in Q1 and Hungary’s government currently expects the economy to contract 6.7 percent this year, the most since 1991. My view is a total policy trap is in operation here, since neither monetary (interest rates are currently 9.5%) or fiscal policy are available, so there is little support to put under the economy at this point. The only way to break the circle in my opinion is to let the forint drop, bring down rates, and restructure the CHF loans./p /blockquote pAs will no doubt come as a big surprise, I completely agree. Hungary needs to address the already existing asymmetry inherent in the economic edifice which should entail a strategy on how to deal with the stock of CHF loans on the households' and corporates' balance sheet. This also gives a final spin on the actual topic of play in this entry./p pIn all probability the dilemma difficulties facing the Hungarian treasury in terms of constructing a viable and solid platform on which to finance its operations is greatly dependent on the issue with the already existing fx denominated loans. If Hungary were to construct a credible and realistic solution to the issue of how to write down/pay off the stock of CHF loans my guess is that the original sin would be a little easier to escape even if not all together./p p /p p---/p p[1] Who follow the lead of a href="http://ideas.repec.org/p/nbr/nberwo/7418.html"Eichengreen and Hausmann/a./pdiv class="blogger-post-footer"img width='1' height='1' src='https://blogger.googleusercontent.com/tracker/1443720106009957151-2694970821999958886?l=easterneuropeeconomy.blogspot.com' alt='' //div]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/escaping-original-sin-in-hungary/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Escaping Original Sin in Hungary</title>
		<link>http://www.straightstocks.com/investing-lessons/escaping-original-sin-in-hungary-2/</link>
		<comments>http://www.straightstocks.com/investing-lessons/escaping-original-sin-in-hungary-2/#comments</comments>
		<pubDate>Thu, 23 Jul 2009 20:18:00 +0000</pubDate>
		<dc:creator>Claus Vistesen</dc:creator>
				<category><![CDATA[Economics]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Claus Vistesen]]></category>
		<category><![CDATA[Con]]></category>
		<category><![CDATA[Copenhagen]]></category>
		<category><![CDATA[currency]]></category>
		<category><![CDATA[currency loans]]></category>
		<category><![CDATA[Debt]]></category>
		<category><![CDATA[Eastern Europe]]></category>
		<category><![CDATA[eastern europe economy watch]]></category>
		<category><![CDATA[Eastern European]]></category>
		<category><![CDATA[foreign currencies]]></category>
		<category><![CDATA[Foreign Currency]]></category>
		<category><![CDATA[href]]></category>
		<category><![CDATA[Hungary]]></category>
		<category><![CDATA[international capital markets]]></category>
		<category><![CDATA[international economics]]></category>
		<category><![CDATA[Maurice]]></category>
		<category><![CDATA[Maurice Obstfeld;]]></category>
		<category><![CDATA[Minister Peter Oszko]]></category>
		<category><![CDATA[onmouseover]]></category>
		<category><![CDATA[Paul Krugman]]></category>
		<category><![CDATA[return]]></category>
		<category><![CDATA[Romania]]></category>
		<category><![CDATA[SIN]]></category>
		<category><![CDATA[U.S]]></category>
		<category><![CDATA[Western European]]></category>
		<category><![CDATA[western european banks]]></category>

		<guid isPermaLink="false">tag:blogger.com,1999:blog-1443720106009957151.post-4502175227082266661</guid>
		<description><![CDATA[div class="body"        pBy Claus Vistesen: Copenhagenbr //ppAccording to a href="http://www.amazon.com/International-Economics-MyEconLab-1-semester-Student/dp/0321488830"the well known textbook in international economics/a by Maurice Obstfeld and Paul Krugman [1] the notion of original sin refers to the fact that many developing economies are not able to borrow in their own currencies but are forced to denominate large parts of their sovereign debt in foreign currency in order to attract capital from foreign investors. The argument then goes that if and when the goings get tough those countries will face difficulties paying off their liabilities and once the dust have settled the sin, as it were, has only become more binding when these same economies yet again venture onto international capital markets./p pIt is interesting to ponder this story in relation to Eastern Europe where far from being a sin the ability to denominate liabilities in foreign currencies such as Euros and Swiss Francs was almost seen as a virtue of modern capital markets during the boom years which followed the famous meeting in Copenhagen which saw the European family expand to 25 countries, a number which now has risen to 27. On the face of it, it is not difficult to see where this virtue came from. Aggressive expansion by western European banks into the CEE and a low volatility environment ultimately driven by the notion of a road map towards convergence bound to bring forth an equalization in living standards and, in the case of many CE economies, a certain membership into the Eurozone underpinned the fact that the ability to shop foreign currency loans was hardly a sin, but a natural counter product of the newly formed European community./p pNow, all this has capsized and those economies who where so busy raising rates going into crisis in order to quell the massive inflationary pressures, which further intensified the flow of foreign currency loans, are now effectively stuck with no ability to tweak monetary policy since the low rates which are needed are either impossible (in the case of the Baltics and their Euro pegs) or de-facto impossible in the context of e.g. Hungary and Romania. Moreover, and in a world where major central banks are stuck at the zero bound and where the level of volatility may itself be volatile as we move from optimism to pessimism all that liquidity may yet again prove to be a destabilising factor in the context of Eastern Europe where we were all, I am sure, amazed, to learn a couple of months ago how some analysts were advising clients to play the carry trade with Eastern European economies as designated targets, for more on this see a href="http://clausvistesen.squarespace.com/alphasources-blog/2009/5/25/the-carry-trade-and-the-global-monetary-credit-transmission.html"this post/a. /p pSo what does all this has to do specifically with Hungary? Well, today we learned from Finance Minister Peter Oszko that Hungary would certainly prefer to issue local currency debt in the future, but given the fact that the IMF loan is not, by nature of it being a loan, permanent Hungary also need to find a viable way to make its policy tools work most effectively. The following excerpt is from Bloomberg;/p blockquote pHungary doesn’t plan to raise foreign-currency debt in the “near future” and will increase sales of forint-denominated bonds to finance the a onmouseover="return escape( popwQuoteShort( this, 'HUGBCBAL:IND' ))" href="http://www.bloomberg.com/apps/quote?ticker=HUGBCBAL%3AIND"budget/a, Finance Minister a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Peter+Oszkoamp;site=wnewsamp;client=wnewsamp;proxystylesheet=wnewsamp;output=xml_no_dtdamp;ie=UTF-8amp;oe=UTF-8amp;filter=pamp;getfields=wnnisamp;sort=date:D:S:d1"Peter Oszko/a told Nepszabadsag. “In the short term, the budget doesn’t need foreign- currency denominated financing sources,” Oszko said in an a onmouseover="return escape( popwOpenWebSite( this ))" href="http://nol.hu/gazdasag/20090723-ha_akarunk__ki_tudunk_menni_a_piacra" target="_blank"interview/a with the Budapest-based newspaper. The Finance Ministry has confirmed the comments to Bloomberg. “Increasing forint-based issuance is more worthwhile.”/p pHungary sold 1 billion euros ($1.42 billion) of debt last week in its first offering since the flight of investors forced it to take a 20 billion-euro bailout from the a onmouseover="return escape( popwOpenWebSite( this ))" href="http://imf.org/" target="_blank"International Monetary Fund/a, the European Union and World Bank in October. The country is working to wean itself off emergency financing. The IMF-led loan, which “secures a comfortable situation,” runs out in March 2010 and the government must work to ensure the country can finance itself from the market at lower rates by then, Oszko said./p p“The July auction’s primary importance wasn’t to secure financing but rather to strengthen confidence in the country,” Oszko said. A “smaller” foreign debt sale is possible in the future as “it’s our basic interest to be active in the market.” Hungary could next target U.S. investors with the sale of dollar-based bonds, the newspaper Napi Gazdasag reported today, citing a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Laszlo+Balassyamp;site=wnewsamp;client=wnewsamp;proxystylesheet=wnewsamp;output=xml_no_dtdamp;ie=UTF-8amp;oe=UTF-8amp;filter=pamp;getfields=wnnisamp;sort=date:D:S:d1"Laszlo Balassy/a, a Budapest-based executive at Citigroup Inc., which helped organize last week’s sale./p /blockquote pIt should immediately be clear that this represents the original sin issue in full vigour although somewhat in reverse one could argue. Consequently and notwithstanding the obvious problems facing Hungary in the context of lowering rates, the country needs to balance the between issuing debt in foreign currency which would mean further currency translation risk and an even further entrenchment of the high domestic interest rates or issuing in domestic currency which might not be possible at current rates (i.e. rates would need to go up further) or simply not viable given the future financing needs./p pTo put all this in the context of a solid macroeconomic analysis I am in luck since a href="http://globaleconomydoesmatter.blogspot.com/2009/07/hungary-struggles-to-apply-its-own.html"Edward has just dished out an up to date look at Hungary's economy/a. As Edward notes straight away, Hungary has now embarked on the great experiment also currently being tested in Latvia of internal devaluation and the long hard climb, through deflation, towards the competitiveness Hungary so badly needs. Now, I know that I tend to move closely together with Edward on many accounts but I dare anyone not to share the sentiment expressed by Edward as he points to the obvious point. The current strategy taken in Hungary to battle the crisis is emnot/em working and at some point one really has to stop to ask why./p pOne striking data point is the fact that while the real economy seems in absolute free fall real wages are still rising and given the inevitable point that Hungary needs wages to fall, and a lot, absent devaluation one wonders silently what kind of contractory jolt the real economy needs in order to engender this effect. Meanwhile, Hungary has also recently pulled out the good old trick of raising the VAT something which will surely to push up the main inflation index, once again pulling in the wrong direction./p pAs usual Edward is thorough, very thorough, and I can only suggest to spend the 20 minutes it takes to superficially digest his points. Especially the point about a monetary policy trap is mandatory reading. In terms of a summary of the situation the following gets to the heart of the matter;/p blockquote pAnd in case you had forgotten, here is what is happening to Hungarian GDP: while wages and prices are rising steadily, GDP is in free fall. Year on year it was down 4.7% in Q1 and Hungary’s government currently expects the economy to contract 6.7 percent this year, the most since 1991. My view is a total policy trap is in operation here, since neither monetary (interest rates are currently 9.5%) or fiscal policy are available, so there is little support to put under the economy at this point. The only way to break the circle in my opinion is to let the forint drop, bring down rates, and restructure the CHF loans./p /blockquote pAs will no doubt come as a big surprise, I completely agree. Hungary needs to address the already existing asymmetry inherent in the economic edifice which should entail a strategy on how to deal with the stock of CHF loans on the households' and corporates' balance sheet. This also gives a final spin on the actual topic of this entry./p pIn all probability the difficulties facing the Hungarian treasury in terms of constructing a viable and solid platform on which to finance its operations is greatly dependent on the issue with the already existing fx denominated loans. If Hungary were to construct a credible and realistic solution to the issue of how to write down/pay off the stock of CHF loans my guess is that the original sin would be a little easier to escape even if not all together./p p /p p---/p p[1] Who follow the lead of a href="http://ideas.repec.org/p/nbr/nberwo/7418.html"Eichengreen and Hausmann/a./p              /divdiv class="blogger-post-footer"img width='1' height='1' src='https://blogger.googleusercontent.com/tracker/1443720106009957151-4502175227082266661?l=easterneuropeeconomy.blogspot.com' alt='' //div]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/escaping-original-sin-in-hungary-2/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Hungary Struggles To Apply Its Own Unique Version Of &#8220;Internal Devaluation&#8221;</title>
		<link>http://www.straightstocks.com/investing-lessons/hungary-struggles-to-apply-its-own-unique-version-of-internal-devaluation/</link>
		<comments>http://www.straightstocks.com/investing-lessons/hungary-struggles-to-apply-its-own-unique-version-of-internal-devaluation/#comments</comments>
		<pubDate>Wed, 22 Jul 2009 20:56:00 +0000</pubDate>
		<dc:creator>Edward Hugh</dc:creator>
				<category><![CDATA[Economics]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[cursory inspection]]></category>
		<category><![CDATA[Eastern Europe]]></category>
		<category><![CDATA[eastern europe economy watch]]></category>
		<category><![CDATA[photo id]]></category>
		<category><![CDATA[private sector employment]]></category>
		<category><![CDATA[public finances]]></category>
		<category><![CDATA[public sector employment]]></category>
		<category><![CDATA[s1600]]></category>
		<category><![CDATA[Statistics Office]]></category>
		<category><![CDATA[style text]]></category>

		<guid isPermaLink="false">tag:blogger.com,1999:blog-1443720106009957151.post-7405040009646051324</guid>
		<description><![CDATA[a href="http://2.bp.blogspot.com/_ngczZkrw340/Sl-DPT0bIUI/AAAAAAAAOsk/VTNecCmHJ1A/s1600-h/hungary+population.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 219px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5359146380635611458" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/Sl-DPT0bIUI/AAAAAAAAOsk/VTNecCmHJ1A/s400/hungary+population.png" //abr /br /Just what the hell is going on in Hungary? This is the question which even the most cursory inspection of the latest round of data coming out of the country leads me to ask myself. What the hell is going on and just what kind of correction is this the IMF are presiding over here?br /br /In May, according to the latest data from the Hungarian statistics office, in the Hungarian private sector real wages were up, and employment was down. Meanwhile in the public sector, real wages were down, but employment was up (contrary to what was supposed to be happening). A recent programme to get workers off the unemployment roles and back to work seems to have had the perverse and contradictory impact of offsetting the fall in private sector employment by giving a sharp boost to public sector employment. So while total employment has remained more or less stable, the balance has shifted, and in the wrong direction. Meanwhile, in an attempt to stem the bloodletting in public finances (the economy remember will probably contract by about 7 percent this year) VAT was raised - by the significant margin of 5 percent (from 20% to 25%) on July 1st, giving consumption, which was already falling sharply, another sharp jolt downwards. Not only that, the Hungararian economy, in order to maintain the value of the forint more or less where it is (all those forex loans) was supposed to be having a major downward correction in wages and prices, yet inflation (which was already at an annual 3.7 percent in June) will surely now be given a hefty kick upwards. So, I ask myself, how does any of this actually make sense, and to who? And meantime the problem of the forex denominated loans remains, and goes jangling around (like any good jailor does) in the background, putting an effective stop on monetary policy just as fiscal policy switches over to complete contracton mode. This is why I talk of "internal devaluation", since the Hungarian authorities (with the agreement of the IMF and the EU Commission) seem to have decided that, rather than resolving the issue of the CHF loans once and for all, they will down the same road that is proving to be so disastrous in Latvia, even though they have their own currency to devalue, should they choose to do so.br /br /At the end of the day, the big question which we are all left with is, whether this structural shift in employment, away from the private sector and towards the public sector, and the increase in the consumer price index to be caused by the sharp VAT hike, plus the ongoing rise in real wages, really is the outcome the IMF support programme was intended to achieve?br /br /strongWages Up, Employment Down/strongbr /br /Amazingly, with an economy contracting at at least a 7% annual rate, Hungarian real private sector wages aren't falling, they are still rising. They were up (over and above inflation) by 1.7% in May. Evidently those who are still in employment say, crisis, what crisis?br /br /a href="http://3.bp.blogspot.com/ngczZkrw340/Sl9f6t0LcZI/AAAAAAAAOsE/Fb2a9eRs80I/s1600-h/hungary+real+wages.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 209px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5359107543929680274" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Sl9f6t0LcZI/AAAAAAAAOsE/Fb2a9eRs80I/s400/hungary+real+wages.png" //abr /br /Unsurprisingly Hungary’s consumer confidence index rose in July for a third month (to minus 63.1) after hitting a record low in April.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SmRcx_RBpYI/AAAAAAAAOs0/3Crziapew_Q/s1600-h/hungary+consumer+confidence.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 237px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360511470343923074" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SmRcx_RBpYI/AAAAAAAAOs0/3Crziapew_Q/s400/hungary+consumer+confidence.png" //abr /br /“Consumers’ perception of their ability to save in the short-run is what improved the most from June,” GKI said in their statement. Well certainly a 5 point hike in VAT is unlikely to encourage them to spend. In fact, paradoxically, saving is what Hungarians collectively really need to do, to reduce the ballooning government debt and pay down the level of net international indebtedness. But all this simply means is that to get the economic growth necessary to do all the required saving Hungary is going to need to export, and a lot more than it was doing previously, which is why the shift towards public sector employment is so serious.br /br /As I say, private sector employment is down in Hungary, by 4.8% y-o-y. While industrial output was down 22.1% in May over a year earlier. Something just doesn't seem to be working as it should be here.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/Sl9xFj2yhHI/AAAAAAAAOsM/52ZajJPo7Ow/s1600-h/hungary+private+employment.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 231px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5359126421932508274" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/Sl9xFj2yhHI/AAAAAAAAOsM/52ZajJPo7Ow/s400/hungary+private+employment.png" //abr /br /On the other hand, public sector employment is on the up and up in Hungary, due to job creation under the short term stimulus programme, courtesy indirectly of the IMF, who have permitted a large than anticipated budget deficit. Don't get me wrong, it's not the stimulus I am quibbling about, it is what it is being used for. The outcomes we are seeing at present don't seem to me to be producing a large structural change in the right direction.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/Sl9xV0ILh7I/AAAAAAAAOsU/TTZp7FMozEA/s1600-h/Hungary+public+sector+employment.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 231px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5359126701178324914" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/Sl9xV0ILh7I/AAAAAAAAOsU/TTZp7FMozEA/s400/Hungary+public+sector+employment.png" //abr /br /Actually the rise in public sector employment is not a direct result of the increase in the IMF permitted deficit, but rather comes from restructuring funds earlier used to finance social assistance payments. The same ammount of money (at about 100 billion HUF) was used to provide public work opportunities for people who before April were entitled to receive social assistance for staying at home. Now those considered capable of working can only receive benefits if they are registered as public workers and if they are offered a job opportunity by local governent they are compelled to accept it. Thus, like so many things in Hungary, the intention was good even if the execution wasn't.br /br /br /Meanwhile, far from the current recession leading to a significant downward shift in wages and prices, real wages are - as we have seen - still rising, and Hungary's consumer prices were still running year on year at 3.7% in June, down it is true from 3.8% in May, but still far to high to start restorting competitiveness. And of course, the July 1st VAT rise will give consumer prices another stout kick upwards, with some analysts suggesting that year end inflation could be running as high as 6%. If this is anywhere near accurate, and the HUF stays in the region of its current euro parity, then Hungary's agony looks set to continue unabated into 2010.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/Slxtv9kECmI/AAAAAAAAOq4/3P8GzmVwGJ4/s1600-h/hungary+CPI.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 230px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5358278327411149410" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/Slxtv9kECmI/AAAAAAAAOq4/3P8GzmVwGJ4/s400/hungary+CPI.png" //abr /br /And in case you had forgotten, here is what is happening to Hungarian GDP: while wages and prices are rising steadily, GDP is in freefall. Year on year it was down 4.7% in Q1 and Hungary’s government currently expects the economy to contract 6.7 percent this year, the most since 1991. My view is a total policy trap is in operation here, since neither monetary (interest rates are currently 9.5%) or fiscal policy are available, so there is little support to put under the economy at this point. The only way to break the circle in my opinion is to let the forint drop, bring down rates, and restructure the CHF loans.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/Sl9xl4KvraI/AAAAAAAAOsc/po_zHb9dZA0/s1600-h/hungary+GDP.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 198px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5359126977140731298" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/Sl9xl4KvraI/AAAAAAAAOsc/po_zHb9dZA0/s400/hungary+GDP.png" //abr /br /The result of all this botched policy - Hungary’s unemployment rate rose to the its highest level in at least a decade in May. The rate rose to a seasonally adjusted 10.2 percent, the highest since at least 1996. And the situation is more likely to deteriorate than improve, with the central bank forecasting lay-offs of around 180,000 in 2009-2010, nearly 5% of the total number of employed.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SmTDeXG_0xI/AAAAAAAAOtE/dctsJ3AVv6k/s1600-h/hungary+unemployment.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 200px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360624382844588818" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SmTDeXG_0xI/AAAAAAAAOtE/dctsJ3AVv6k/s400/hungary+unemployment.png" //abr /One of the important things to grasp about the current situation in Hungary is that this is not a constant size wheel running constantly around the same spindle. The long run outloook is steadily deteriorating as population falls and ages. The same is also true of the working age population, which has now been falling steadily for some years (see chart below).Unsurprisingly therefore the NBH now project that employment will fall by 3.2% this year, followed by a 1.7% contraction in 2010, notably primarily due to layoffs in the private sector.br /br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/Sh5J1P-z2bI/AAAAAAAAOFc/ALMM9CLPjKc/s1600-h/hungary+one.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 205px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5340787387279858098" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/Sh5J1P-z2bI/AAAAAAAAOFc/ALMM9CLPjKc/s400/hungary+one.png" //abr /Hungary’s industrial output fell at a slower annual pace in May than it did in April as stimulus plans in the European car industry added to demand, but production was still down 22.1 percent on May 2008 (following a 25.3 percent annual decrease in April). Output rose 2.6 percent over the month.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SmTf_yyWCNI/AAAAAAAAOtU/-O1nOOsAo4g/s1600-h/industrial+output+one.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 239px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360655743535417554" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SmTf_yyWCNI/AAAAAAAAOtU/-O1nOOsAo4g/s400/industrial+output+one.png" //abr /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SmTf64ql2_I/AAAAAAAAOtM/aFLQ88q52ag/s1600-h/industrial+output+two.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 240px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360655659214167026" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SmTf64ql2_I/AAAAAAAAOtM/aFLQ88q52ag/s400/industrial+output+two.png" //abr /br /Hungary's contraction seems to be more or less moving sideways at the moment, and the June PMI came in at 45.8, a slight uptick from 45.4 in May, but hardly a seismic shift. The output improvement was almost all due to the export sector.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SksscoKV2II/AAAAAAAAOgM/GSWNOfFKKKw/s1600-h/hungary+pmi.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 227px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5353421452388718722" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SksscoKV2II/AAAAAAAAOgM/GSWNOfFKKKw/s400/hungary+pmi.png" //abr /br /strongExports/strongbr /br /Hungary recorded its fourth monthly trade surplus in May, and came in at 497.7 million euros as compared with 430.3 million euros in April and a deficit of 30.3 million euros in May last year.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SmYOjMdHvAI/AAAAAAAAOtk/3K9tHC8PBSc/s1600-h/hungary+exports+one.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 219px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360988404232731650" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SmYOjMdHvAI/AAAAAAAAOtk/3K9tHC8PBSc/s400/hungary+exports+one.png" //abr /br /Now good news is always good news, but it is important to understand that this result was almost entirely achieved via a dramatic drop in imports, which plunged 32.3 percent in May (following a 35.4 percent decline in April). It is impossible to talk of any marked improvement in exports, since these fell by an annual 24.1 percent, accelerating from a 29.4 percent drop in April. While in the short term this substantial drop in imports (and hence rise in the trade balance) is GDP positive, it is very negative for living standards in the longer term, and the whole situation needs to be reversed by a large boost in exports leading imports as the eurozone economy eventually recovers. But to be able to achieve this Hungarian industry needs to do more, much more, to achieve competitiveness.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/SmYObikPqGI/AAAAAAAAOtc/rGQcfhKyQvA/s1600-h/hungary+exports+two.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 204px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360988272729237602" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SmYObikPqGI/AAAAAAAAOtc/rGQcfhKyQvA/s400/hungary+exports+two.png" //abr /br /br /strongInvestment Activity/strongbr /br /br /Hungary is suffering from a generalised drop in demand - domestic, export, government, and investment - for which it is difficult to see any short term remedy. In the first quarter of 2009 investments fell by 7.7% compared to the same period of 2008, while they decreased by 1.1% in comparison with the previous quarter (according to seasonally adjusted volume indices). Within this fall machinery and equipment decreased by 9.9%, while investment in manufacturing industry was down by 6.8%. Evidently the first sign of any real recovery in the Hungarian economy will come when investments stabilise and even start to increase, since that will be a reflection of the expectation of future demand arriving further down the pipeline.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/SiaOg8uuBBI/AAAAAAAAON0/TttiN3W_t1k/s1600-h/hungary+investment.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 200px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5343114704630711314" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SiaOg8uuBBI/AAAAAAAAON0/TttiN3W_t1k/s400/hungary+investment.png" //abr /br /strongConstruction/strongbr /br /Construction activity was down by 10.1% compared to May 2008. In the first five months of the year, output decreased by 6.9%. In comparison with April production decreased by 3.3%. Construction output showed a decreasing trend in connection with the global economic crisis in the past months. In fact there was a significant difference between the performance of the two construction branches, with buildings activity falling by nearly a quarter, while civil engineering works were up by 7.9%. On a seasonally adjusted basis, building activity was 8.6% lower in May over April, while civil engineering was up one percent on the month.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/SmYRqf4MQQI/AAAAAAAAOt4/cglaIkZQpy4/s1600-h/hungary+construction+yoy.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 209px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360991828240515330" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SmYRqf4MQQI/AAAAAAAAOt4/cglaIkZQpy4/s400/hungary+construction+yoy.png" //abr /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SmYRla8pw1I/AAAAAAAAOts/g3YZVL9BBcc/s1600-h/hungary+construction+index.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 211px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360991741017703250" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SmYRla8pw1I/AAAAAAAAOts/g3YZVL9BBcc/s400/hungary+construction+index.png" //abr /br /strongRetail Trade/strongbr /br /Retail sales fell 3.4% year-on-year in the first four months of 2009. In April the fall in retail sales accelerated, and the volume index was down 4.1% compared with April 2008. Retail sales decreased by 0.3% over March according to seasonally and calendar adjusted data.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SmYTfWbzpsI/AAAAAAAAOuI/JZ1lNrXYtNA/s1600-h/hungary+retail+one.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 231px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360993835750237890" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SmYTfWbzpsI/AAAAAAAAOuI/JZ1lNrXYtNA/s400/hungary+retail+one.png" //abr /br /But the real problem is that Hungary's retail sales are now in long term decline, and it is hard to see this situation turning round as the population declines. The peaked in mid 2006, and it has been downhill ever since. This highlights the important point that Hungary's economic difficulties - like Italy's, which bear some resemblance, are not of recent origin, but go back to the adjustment process that started following the mini crisis of June 2006, an adjustment which has never, at the end of the day, achieved the results which were expected of it, and the real question is, why not?br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SmYTbCg7VnI/AAAAAAAAOuA/dVzFLxNECos/s1600-h/hungary+retail+two.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 231px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360993761683527282" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SmYTbCg7VnI/AAAAAAAAOuA/dVzFLxNECos/s400/hungary+retail+two.png" //abr /br /strongMonetary Policy Trap/strongbr /br /Back in April, the Hungarian Finance Ministry were expecting a 155 billion forint budget surplus for the second half of this year, but since then the economic outlook has continued to deteriorate, and  according to their latest estimate there will actually be a 149.6 billion forint deficit in H2. This anticipated shortfall  is the principal reason why the IMF and the European Commission recently agreed to let Hungary raise its deficit target to 3.9% of GDP for 2009 from the 2.9% previously agreed. They did this in response to the larger-than-expected economic recession,  thus avoiding the additional fiscal tightening measures which would have been needed to hold the deficit below the Maastricht 3.0% target level. The gap in 2010 is now expected to come in only a tad lower than this year at 3.8% of gross domestic product (although this number is subject to considerable revision given the levels of uncertainty facing the economy and hence government revenue and spending). As a result, the EU Commission in their latest forecast suggest gross government debt to GDP will reach 80.8% in 2009, and 82.3% in 2010, way above the 60% euro adoption level.br /br /Nonetheless the Hungarian government is in bullish mood. According to Finance Minister Peter Oszko in a Bloomberg TV interview “Recently there has been a turning point......Financial risks are very quickly decreasing in terms of the whole budget. The Hungarian government is committed to implementing a reform program quite quickly.”br /br /Capital Economics' Neil Shearing isn't so convinced:br /br /blockquoteBut is this new-found optimism justified? Possibly. The National Bank will certainly take heart from the fact that the bond market is functioning once again following a complete freeze late last year. This adds weight to the case for interest rates to be gradually lowered, with a 50bps cut to later this month looking increasingly likely. But amongst all the euphoria, it is important to keep some sense of perspective. First, while the government managed to complete the bond auction successfully, it came at a price. At 6.79%, the yield on the new bonds is around 90bps higher than what existing 2014 euro-bonds currently trade at./blockquoteThere is indeed a general feeling in the air that monetary easing is coming, and in fact three members of the central bank's Monetary Council voted even at the last meeting to lower the key policy rate by 50 basis points, according to minutes of the 22 June rate setting meeting. The MPC is set to hold its next policy meeting on 27 July, and is widely expected to start a monetary easing cycle. My view: just watch out what happens next.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SmNsDdHZnII/AAAAAAAAOss/WH7AlKZ-qM8/s1600-h/Hungary+interest+rates.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 244px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360246788112096386" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SmNsDdHZnII/AAAAAAAAOss/WH7AlKZ-qM8/s400/Hungary+interest+rates.png" //abr /br /Basically the problem is the value of the forint. My opinion is that the recent recovery in the currency value (see chart below) has been almost entirely driven by yield differentials, and by self-fulfilling expectations (traders expect the currency to rise), rather than by any change in the underlying economic fundamentals, which as we have seen, has not taken place.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SmSrM0ZPDQI/AAAAAAAAOs8/7Lod3lFPusw/s1600-h/five+year+forint+chart.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 241px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360597693189000450" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/SmSrM0ZPDQI/AAAAAAAAOs8/7Lod3lFPusw/s400/five+year+forint+chart.png" //abr /br /And if you are in any doubt about the extent to which Hungary has lost competitiveness since the start of the century, just take a look at the comparative REERs for Germany and Hungary below (REERs are trade weighted, and take account not only inflation but also movements in unit labour costs, ie productivity).br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/Smd7-ibwqnI/AAAAAAAAOus/DIOmNe2z1vk/s1600-h/Hungary+REER.png"img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 227px;" src="http://4.bp.blogspot.com/_ngczZkrw340/Smd7-ibwqnI/AAAAAAAAOus/DIOmNe2z1vk/s400/Hungary+REER.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5361390195733211762" //abr /br /The problem the central bank and the Finance Ministry have to address is the ongoing issue of the mountain of Swiss Franc denominated mortgages (see chart).br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/SmYUfZAoTDI/AAAAAAAAOuY/PmrkYKRgbkk/s1600-h/forex+mortgages.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 236px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360994935953181746" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SmYUfZAoTDI/AAAAAAAAOuY/PmrkYKRgbkk/s400/forex+mortgages.png" //abr /br /These have stopped increasing in recent times, but still constitute a serious obstacle to any devaluation of the HUF, due to the non performing loans issue this would create for the banking sector. Not only has money been borrowed against homes for to fund house purchases, it has also been loaned for consumption (see chart below), so indeed the fact that even these loans are stagnating hardly bodes well in any way for domestic demand.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SmYT-D8LNwI/AAAAAAAAOuQ/JtXXef8ke4s/s1600-h/Hungarian+Refis.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 252px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360994363361670914" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SmYT-D8LNwI/AAAAAAAAOuQ/JtXXef8ke4s/s400/Hungarian+Refis.png" //abr /br /The thing is, as long as the interest rate differential remains as it is, there is no possibility of convincing people to take out HUF denominated mortgages. So domestic rates have to come down, but as they come down the forint will fall, and the number of distressed loans will spiral up. So the authorities are stuck in a real policy trap, where they have to wriggle uncomfortably around, carrying out what can only be described as a weird variant of voluntary internal devaluation, an intenral devaluation which again, as we have seen from the wage and price data, just isn't happening.br /br /Obviously the whole idea IMF idea here was some sort of long term "play" - moving the focus of taxation from employment to consumption (addressing the tax wedge issue). Initially this shift was supported by the argument, that, amidst a deflationary backdrop, businesses wouldn't be able to pass the tax increase on to consumers in its entirety. At this point it would seem the Hungarian government has no real room for manouver and are desperate to implement the tax restructuring, therefore they opted for the significant VAT raise.br /br /Part of the thinking which lies behind the present approach seems to be some new concept of financial orthodoxy. The IMF put it like this in the Hungary Standby Loan Report br /br /blockquoteIn emerging market countries with debt overhangs, the “Keynesian” effect of fiscal adjustment is likely to be outweighed by “non-Keynesian” effects related to expectations and credibility. Non- Keynesian effects have to do with the offsetting response of private saving to policy-related changes in public saving. In particular, if fiscal adjustment credibly signals improved public sector solvency, a fiscal contraction could turn out to be expansionary, as private consumption rises based on the view that future tax hikes will be smaller than previously envisaged.br /IMF - Hungary, Request for Stand-By Arrangement, November 4, 2008/blockquotebr /br /So from Tallinin, to Riga, to Budapest, to Bucharest, the same sonata on a single note is being played, and the message is a clear one - cut spending and you will expand.br /br /But with consumption sinking, government spending falling and exports insufficiently competitive to drive the necessary surplus, the whole thing is now becoming rather a mess, with no clear economic policy objective in the short term (except, of course, maintaining a strong exchange rate) and while in the long term the emphasis is rightly on export. But no one has any idea of how exactly to correct prices sufficiently with the CHF mortgages stuck in the middle.br /br /And the new bond issue only makes things worse here, since as Neil Shearing emphasises:br /br /blockquoteit is worth noting that the latest euro-bond issue only adds to the mountain of foreign currency denominated debt that lies at the heart of Hungary’s current woes. With the banking sector still in deep trouble and fiscal policy set to tighten, the recession is likely to intensify over the coming quarters./blockquotebr /br /So, with the Hungarian government currently forecasting a GDP contraction of 6.7 percent,this year, and the likelihood being of further contractions next year and possibly even in 2011, something somewhere is going to give here. br /br /And among the casualties, well why not Hungary's unborn children, the ones she needs to start turning round that population decline I started this post with.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/Smd0jPggZ1I/AAAAAAAAOuk/XUdzO5oeX1Q/s1600-h/hungary+births.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 220px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5361382030214981458" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/Smd0jPggZ1I/AAAAAAAAOuk/XUdzO5oeX1Q/s400/hungary+births.png" //abr /br /According to preliminary data from the stats office, in the first five months of 2009 38,964 children were born, 1.9 percent less than in the first five months of 2008. But that isn't all, if you look carefully at the chart you will see that the number of children born fell substantially from about March 2007, just nine months after the first financial shock hit Hungary in June 2006. So here's a nice prediction, if economic conditions do work as a short term influence on fertility, then we should see another sharp drop in Hungarian births starting in from July, just nine months after the last financial crisis hit the Hungarian economy. There, I bet you never imagined that the collapse of Lehman Brothers could have such far reaching consequences, now did you?div class="blogger-post-footer"img width='1' height='1' src='https://blogger.googleusercontent.com/tracker/1443720106009957151-7405040009646051324?l=easterneuropeeconomy.blogspot.com' alt='' //div]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/hungary-struggles-to-apply-its-own-unique-version-of-internal-devaluation/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Carl Bildt on the Eastern Partnership</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/carl-bildt-on-the-eastern-partnership/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/carl-bildt-on-the-eastern-partnership/#comments</comments>
		<pubDate>Wed, 22 Jul 2009 19:50:30 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Market Commentary]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Commission of European Communities;]]></category>
		<category><![CDATA[european commission]]></category>
		<category><![CDATA[The Macro Trader]]></category>
		<category><![CDATA[Turkey]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.19501</guid>
		<description><![CDATA[Here the Foreign Minister of Sweden writes on the need for a "reset" on RealClearWorld:The Swedish Presidency, together with the European Commission, intends to organise the first meeting of the Eastern Partnership Civil Society Forum this autumn. We hope to...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/carl-bildt-on-the-eastern-partnership/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>The Race Away from Russia</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/the-race-away-from-russia/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/the-race-away-from-russia/#comments</comments>
		<pubDate>Mon, 20 Jul 2009 14:27:46 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Asia]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Market Commentary]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Alexander Lukashenko]]></category>
		<category><![CDATA[Alexei Mukhin]]></category>
		<category><![CDATA[Armenia]]></category>
		<category><![CDATA[Azerbaijan]]></category>
		<category><![CDATA[Belarus]]></category>
		<category><![CDATA[Center of Political Information]]></category>
		<category><![CDATA[Commonwealth Day]]></category>
		<category><![CDATA[Commonwealth of Independent States]]></category>
		<category><![CDATA[Georgia]]></category>
		<category><![CDATA[Harley Davidson]]></category>
		<category><![CDATA[head]]></category>
		<category><![CDATA[Kazakhstan]]></category>
		<category><![CDATA[Kyrgyzstan]]></category>
		<category><![CDATA[Moldova]]></category>
		<category><![CDATA[Moscow]]></category>
		<category><![CDATA[president]]></category>
		<category><![CDATA[Tajikistan]]></category>
		<category><![CDATA[The Macro Trader]]></category>
		<category><![CDATA[Turkmenistan]]></category>
		<category><![CDATA[Ukraine]]></category>
		<category><![CDATA[Uzbekistan]]></category>
		<category><![CDATA[vladimir putin]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.19462</guid>
		<description><![CDATA[Reuters points out some members of the CIS are having some disagreements with the Kremlin.This year's Presidential Cup horse race, a traditional cue for an informal gathering of the 11-member Commonwealth of Independent States (CIS), drew only five top guests:...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/the-race-away-from-russia/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Listening to Eastern Europe</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/listening-to-eastern-europe/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/listening-to-eastern-europe/#comments</comments>
		<pubDate>Mon, 20 Jul 2009 14:14:37 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Market Commentary]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Afghanistan]]></category>
		<category><![CDATA[Alexander Kwasniewski]]></category>
		<category><![CDATA[Alexandr Vondra]]></category>
		<category><![CDATA[Barack Obama]]></category>
		<category><![CDATA[Crimea;]]></category>
		<category><![CDATA[Czech Republic]]></category>
		<category><![CDATA[Georgia]]></category>
		<category><![CDATA[Italy]]></category>
		<category><![CDATA[Joseph Biden]]></category>
		<category><![CDATA[Kiev]]></category>
		<category><![CDATA[Latvia]]></category>
		<category><![CDATA[Lech Walesa]]></category>
		<category><![CDATA[Lithuania]]></category>
		<category><![CDATA[Moscow]]></category>
		<category><![CDATA[North Atlantic Treaty Organization]]></category>
		<category><![CDATA[Obama administration]]></category>
		<category><![CDATA[Oil And Gas]]></category>
		<category><![CDATA[Poland]]></category>
		<category><![CDATA[Prime Minister]]></category>
		<category><![CDATA[Putin]]></category>
		<category><![CDATA[The Macro Trader]]></category>
		<category><![CDATA[Ukraine]]></category>
		<category><![CDATA[United States]]></category>
		<category><![CDATA[Vaclav Havel;]]></category>
		<category><![CDATA[Vp]]></category>
		<category><![CDATA[Washington]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.19461</guid>
		<description><![CDATA[Ever since Barack Obama's first relatively friendly state visit to Moscow, Washington and the Kremlin have engaged in a showdown of gestures over the elephant in the room:&#160; the legitimacy of Russia's claim to a privileged sphere of influences.&#160; Directly...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/listening-to-eastern-europe/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Russia Has Rebooted to Default with Murder</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/russia-has-rebooted-to-default-with-murder/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/russia-has-rebooted-to-default-with-murder/#comments</comments>
		<pubDate>Thu, 16 Jul 2009 22:06:12 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Market Commentary]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Chechnya]]></category>
		<category><![CDATA[David Satter]]></category>
		<category><![CDATA[energy trade]]></category>
		<category><![CDATA[Human rights leader]]></category>
		<category><![CDATA[law enforcement]]></category>
		<category><![CDATA[Lev Ponomarev;]]></category>
		<category><![CDATA[Moscow]]></category>
		<category><![CDATA[mourning rights activist]]></category>
		<category><![CDATA[murdered rights activist]]></category>
		<category><![CDATA[Natalya Estemirova]]></category>
		<category><![CDATA[New;]]></category>
		<category><![CDATA[Putin]]></category>
		<category><![CDATA[The Financial Times]]></category>
		<category><![CDATA[The Macro Trader]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.19433</guid>
		<description><![CDATA[This is from my latest contribution to the Huffington Post:No one can cast personal blame for a murder when the culprit is an entire system of grand corruption. For years now, self-enriching state officials have gorged themselves on public institutions...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/russia-has-rebooted-to-default-with-murder/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Transparency is Gazproms Kryptonite</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/transparency-is-gazproms-kryptonite/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/transparency-is-gazproms-kryptonite/#comments</comments>
		<pubDate>Thu, 16 Jul 2009 13:05:08 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Market Commentary]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[The Macro Trader]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.19422</guid>
		<description><![CDATA[Considering the tone coming out of Brussels these days, I think it is safe to say that Russia has really blown its trusted "reliable supplier" cover after a few too many supply cuts.&#160; This new draft law looks very interesting,...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/transparency-is-gazproms-kryptonite/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>A Letter to Obama</title>
		<link>http://www.straightstocks.com/investing-in-russia-stocks/a-letter-to-obama/</link>
		<comments>http://www.straightstocks.com/investing-in-russia-stocks/a-letter-to-obama/#comments</comments>
		<pubDate>Thu, 16 Jul 2009 12:31:24 +0000</pubDate>
		<dc:creator>Robert Amsterdam</dc:creator>
				<category><![CDATA[Europe]]></category>
		<category><![CDATA[Market Commentary]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[Adam Rotfeld]]></category>
		<category><![CDATA[Afghanistan]]></category>
		<category><![CDATA[Alexander Kwasniewski]]></category>
		<category><![CDATA[America]]></category>
		<category><![CDATA[anti-globalization activist]]></category>
		<category><![CDATA[Asia]]></category>
		<category><![CDATA[Associated Press]]></category>
		<category><![CDATA[Baku]]></category>
		<category><![CDATA[Baku-Tbilisi-Ceyhan pipeline]]></category>
		<category><![CDATA[Balkans]]></category>
		<category><![CDATA[Baltics]]></category>
		<category><![CDATA[Barack Obama]]></category>
		<category><![CDATA[Black Sea]]></category>
		<category><![CDATA[Central Europe]]></category>
		<category><![CDATA[Commission of European Communities;]]></category>
		<category><![CDATA[Czech Republic]]></category>
		<category><![CDATA[Eastern Europe]]></category>
		<category><![CDATA[Emil Constantinescu]]></category>
		<category><![CDATA[energy]]></category>
		<category><![CDATA[energy blockades]]></category>
		<category><![CDATA[energy mix]]></category>
		<category><![CDATA[Energy Security]]></category>
		<category><![CDATA[energy security lies]]></category>
		<category><![CDATA[energy supplies]]></category>
		<category><![CDATA[EU Commission]]></category>
		<category><![CDATA[Euroatlantic Partnership Council]]></category>
		<category><![CDATA[European Union]]></category>
		<category><![CDATA[Gazeta Wyborcza;]]></category>
		<category><![CDATA[German Marshall Fund]]></category>
		<category><![CDATA[Iraq]]></category>
		<category><![CDATA[Ivan Krastev]]></category>
		<category><![CDATA[Jose Bove]]></category>
		<category><![CDATA[Kadri Liik]]></category>
		<category><![CDATA[Karel Schwarzenberg]]></category>
		<category><![CDATA[Lech Walesa]]></category>
		<category><![CDATA[Martin Butora]]></category>
		<category><![CDATA[media manipulation]]></category>
		<category><![CDATA[Michal Kovac]]></category>
		<category><![CDATA[Middle East]]></category>
		<category><![CDATA[Moscow]]></category>
		<category><![CDATA[Nabucco pipeline;]]></category>
		<category><![CDATA[NATO's Partnership]]></category>
		<category><![CDATA[North Atlantic Treaty Organization]]></category>
		<category><![CDATA[Obama administration]]></category>
		<category><![CDATA[Pakistan]]></category>
		<category><![CDATA[Paris]]></category>
		<category><![CDATA[Poland]]></category>
		<category><![CDATA[president]]></category>
		<category><![CDATA[Reuters]]></category>
		<category><![CDATA[Romania]]></category>
		<category><![CDATA[Sandra Kalniete]]></category>
		<category><![CDATA[Solidarity;]]></category>
		<category><![CDATA[Tbilisi]]></category>
		<category><![CDATA[The Alliance]]></category>
		<category><![CDATA[The Macro Trader]]></category>
		<category><![CDATA[Turkey]]></category>
		<category><![CDATA[United States]]></category>
		<category><![CDATA[Vaclav Havel;]]></category>
		<category><![CDATA[Washington]]></category>
		<category><![CDATA[Western Europe]]></category>

		<guid isPermaLink="false">tag:www.robertamsterdam.com,2009://1.19421</guid>
		<description><![CDATA[Vaclav Havel, Lech Walesa, and a long list of other former leaders of Eastern European states have penned an open letter to U.S. President Barack Obama expressing their fears over what kinds of sacrifices to their sovereignty might come along...]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-in-russia-stocks/a-letter-to-obama/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>IMF Imposes New Conditions On Latvia</title>
		<link>http://www.straightstocks.com/investing-lessons/imf-imposes-new-conditions-on-latvia/</link>
		<comments>http://www.straightstocks.com/investing-lessons/imf-imposes-new-conditions-on-latvia/#comments</comments>
		<pubDate>Wed, 15 Jul 2009 09:36:00 +0000</pubDate>
		<dc:creator>Edward Hugh</dc:creator>
				<category><![CDATA[Economics]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Aaron Eglitis;]]></category>
		<category><![CDATA[Argentina]]></category>
		<category><![CDATA[Caroline Atkinson;]]></category>
		<category><![CDATA[Commission]]></category>
		<category><![CDATA[Eastern Europe]]></category>
		<category><![CDATA[eastern europe economy watch]]></category>
		<category><![CDATA[end]]></category>
		<category><![CDATA[external specialists]]></category>
		<category><![CDATA[final kiss]]></category>
		<category><![CDATA[Ft Alphaville]]></category>
		<category><![CDATA[fund]]></category>
		<category><![CDATA[grande finale]]></category>
		<category><![CDATA[hari kiri]]></category>
		<category><![CDATA[href]]></category>
		<category><![CDATA[Imf]]></category>
		<category><![CDATA[imf loan]]></category>
		<category><![CDATA[International Monetary Fund]]></category>
		<category><![CDATA[Izabella Kaminska]]></category>
		<category><![CDATA[Latvia]]></category>
		<category><![CDATA[latvian news]]></category>
		<category><![CDATA[POINT;]]></category>
		<category><![CDATA[Riga]]></category>
		<category><![CDATA[Washington]]></category>
		<category><![CDATA[way]]></category>

		<guid isPermaLink="false">tag:blogger.com,1999:blog-1443720106009957151.post-7476635134343987546</guid>
		<description><![CDATA[Izabella Kaminska a href="http://ftalphaville.ft.com/blog/2009/07/15/62126/trouble-in-latvia-again/"at FT Alphaville has the story/a (via Reuters):br /br /blockquoteThe International Monetary Fund has put forward new, difficult conditions for Latvia to receive further loans, the prime minister said on Wednesday in a further sign the Fund is being tougher than the European Commission./blockquotebr /br /It isn't clear at this point what these conditions are. Rumour has it they may be an end to the flat income tax, or a hike in VAT. A hike in VAT would be more hari-kiri, since this would again hit consumption AND would boost inflation at a time when they are trying to deflate to carry through an internal currency correction. It also isn't clear whether this is a serious attempt to add new conditions (which I find unlikely, given how advanced the distemper is) or whether this is a way for the IMF to get themselves off the hook (ie leave the EU Commission to stew in its own juice) without having a public and potentially damaging break with the EU. The IMF need to find some sort of exit strategy I think (since Latvia evidently at this point doesn't have one), or it risks losing its own credibility if it puts a seal of approval (by granting the next tranche) on something which most external specialists now think could end up in a very messy grande finale. Argentina ghosts are stalking the corridors in Washington, not because of the similarities between the two countries (they are, at the end of the day pretty different), but because of the way giving a final "kiss of death" loan to a country can ultimately come back and haunt you.br /br /strongUpdate One/strongbr /br /The local Latvian news agency is saying that if Latvia and the IMF do not sign the new agreement by Friday, Latvia may not see the next chunk of the IMF loan and it could jeopardize the further funding from the EC. This could be brinksmanship, but even brinkmanship can go badly wrong if the other party can't concede. And who is the other party here? Latvia or the EU Commission, since they already said they are happy with progress. What a muddle!br /br /strongUpdate Two - Thursday Afternoon/strongbr /br /a href="http://www.bloomberg.com/apps/news?pid=20601095sid=aCSIEcidixu4"Bloomberg's Aaron Eglitis reports this afternoon/a that Friday may in fact not be any kind of deadline. He quotes Caroline Atkinson, head of external relations at the IMF, in Washington, to the effect that the head of the IMF mission in Riga is returning to Washington this weekend as scheduled, while the mission itself would “continue its work.” This suggests there will be no final decision this week. She also said there was  “broad consensus among all the parties involved” about the goals for Latvia,  declining to go into specifics.  br /br /Rumourology has it that the IMF wants the government to become more effective in revenue collection, with the fear that the current contraction may be so strong due to the fact that part of the economy is disappearing back into a "grey area" as a backdrop. Various proposals are being floated around, but perhaps it would be better to wait for some concrete information before speculating about this.br /br /Latvian central bank Governor Ilmars Rimsevics has also been holding a press conference in Riga today, and he took the opportunity to suggest that the country’s budget deficit was likely to grow to between 9.5 percent and 10 percent this year. If this is the case, then this would obviously put Latvia outside the 60% gross debt to GDP criteria by 2010, which would make euro membership as an exit strategy non viable over the relevant horizon in my view. Just a long shot, but maybe that is what they are all arguing about. The EU clearly has to offer the four peggars more in the way of a carrot, although they themselves need to remember - looking over at Slovakia and Slovenia - that mere euro membership is no panacea to cure all ills.div class="blogger-post-footer"img width='1' height='1' src='https://blogger.googleusercontent.com/tracker/1443720106009957151-7476635134343987546?l=easterneuropeeconomy.blogspot.com' alt='' //div]]></description>
		<wfw:commentRss>http://www.straightstocks.com/investing-lessons/imf-imposes-new-conditions-on-latvia/feed/</wfw:commentRss>
		<slash:comments>0</slash:comments>
		</item>
		<item>
		<title>Russia&#8217;s Contraction Eases But Knife-edge Risks Remain For 2010</title>
		<link>http://www.straightstocks.com/investing-lessons/russias-contraction-eases-but-knife-edge-risks-remain-for-2010-3/</link>
		<comments>http://www.straightstocks.com/investing-lessons/russias-contraction-eases-but-knife-edge-risks-remain-for-2010-3/#comments</comments>
		<pubDate>Wed, 15 Jul 2009 07:33:00 +0000</pubDate>
		<dc:creator>Edward Hugh</dc:creator>
				<category><![CDATA[Economics]]></category>
		<category><![CDATA[Europe]]></category>
		<category><![CDATA[Investing Lessons]]></category>
		<category><![CDATA[Analyst Estimates]]></category>
		<category><![CDATA[Contraction]]></category>
		<category><![CDATA[currency basket]]></category>
		<category><![CDATA[Eastern Europe]]></category>
		<category><![CDATA[eastern europe economy watch]]></category>
		<category><![CDATA[href]]></category>
		<category><![CDATA[initial reduction]]></category>
		<category><![CDATA[less than three months]]></category>
		<category><![CDATA[May;]]></category>
		<category><![CDATA[Neil Shearing;]]></category>
		<category><![CDATA[percent]]></category>
		<category><![CDATA[rate]]></category>
		<category><![CDATA[Russia]]></category>
		<category><![CDATA[russian ruble]]></category>
		<category><![CDATA[s1600]]></category>
		<category><![CDATA[Sberbank]]></category>
		<category><![CDATA[seven consecutive days]]></category>
		<category><![CDATA[style]]></category>

		<guid isPermaLink="false">tag:blogger.com,1999:blog-1443720106009957151.post-2443977195079814329</guid>
		<description><![CDATA[The Russian ruble strengthened the most in more than three months against the dollar yesterday (gaining 1.7 percent to 32.2247 per dollar at one point) as oil rebounded above $60 a barrel and OAO Sberbank reported better-than-expected earnings. Sberbank shares jumped 5.1 percent after first-quarter net income turned out to be above analyst estimates. But the rise was also helped by the fact that Russia’s central bank spent approximately $2 billion from reserves to try to stop the ruble from falling yesterday, taking central bank reserve spending over the two working days since they lowered interest rates half a percantage point on Friday to around $4 billion, a href="http://www.bloomberg.com/apps/news?pid=newsarchiveamp;sid=aTqgrOY1vdEo"according to reports in the newspaper Kommersant/a.br /br /Russia’s central bank cut its main interest rates for the fourth time in less than three months at the end of last week after the government estimated the economy contracted an annual 10.2 percent in the January-May period. Bank Rossii lowered the refinancing rate to 11 percent from 11.5 percent following on initial reduction on April 24 and two further cuts on May 13 and June 5.br /br /pa href="http://3.bp.blogspot.com/_ngczZkrw340/SlpNAMaaP7I/AAAAAAAAOo4/0apqyMXjXW0/s1600-h/russia+interest+rates.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 229px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5357679372437962674" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SlpNAMaaP7I/AAAAAAAAOo4/0apqyMXjXW0/s400/russia+interest+rates.png" //abr /br /But the striking thing here is that today's ruble surge followed seven consecutive days when it fell - including yesterday when it dropped 0.5 percent against the euro and 0.1 percent against the dollar to hit the lowest close against the central bank's currency basket since May 4. Indeed only last week the ruble posted its steepest slide against the euro and dollar since January as oil prices fell and Russia's budget deficit contined towiden. And to top it all, as I say, the central bank reduced interest rates for the fourth time in less than three months.br /br /Indeed just after the rate cut Alfa Bank’s Chief Economist Natalia Orlova commented that she was seeing a “very fragile trend” in the ruble, with a lot of downside potential: and I completely agree with her. What we have is a lot of volatility and a lot of market nervousness. Just this morning Bloomberg a href="http://www.bloomberg.com/apps/news?pid=20601095amp;sid=aSY6npP9UTBY"cited a research report from the ING Group/a warning that "the ruble may drop as much as 5.8 percent to the weakest end of Russia’s target exchange-rate basket as the central bank aims to revive credit by lowering key interest rates by up to 4 percentage points.” (research note a href="http://data.cbonds.info/comments/2009/39111/2009061316070124_E.pdf"here/a).br /br /My feeling is that a 400 basis-point reduction would have an even bigger impact than even ING expect. Basically central banks in a number of central and east European countries are caught in a kind of trap, where the high level of forex borrowing both households and companies have engaged in makes local monetary policy rather impotent, and worse, this impotence itself becomes a self perpetuating situation. The trap perpetuates itself since people become reluctant to take out local currency denominated loans due to the high interest rate they carry, so they take out either dollar- or euro-denominated ones and thus make matters even worse, making the possibly erroneous assumtion that end game of all this will be either a dollar collapse (the Russian view) or eventual euro membership (in places like Hungary and Romania). Those doing the borrowing thus feel themselves to be completely covered, and fail to take into account the capital loss that could follow a large correction in their own local currency. br /br /Slowly monetary policy makers in the most affected countries are coming to recognise that they need to address the issue, and somehow or other to get rates down, since the problem is not going to simply go away, and the meanwhile the respective economies keep on shrinking, with no positive boost from local monetary policy. But it is just when they start to lower rates that things start to turn nasty on them, since the whole situation is non-linear. Supporting a currency with high interest rates works for as long as it does on the win-win dynamic of yield differential AND a rising currency, but once the so called carry trade "punters" get the idea that political pressures to address the economic contraction may force substantial rate cuts on the government and the monetary authorities, and that the expectation of such rate cuts may lead the other "punters" to sell local instruments and exit the market, then the "thinking punter" finds he or she also needs to sell, and this is how we get to see that "will the last one out of the door please turn the lights off" type of self fulfilling herd behaviour.br /br /I would say Serbia, Ukraine, Hungary, Romania and Russia are all vulnerable to this kind of outcome. Of course, from a macro economic viewpoint they can all start to bring interest rates down as inflation steadily drops, but I'm not sure that the inflation element is an important consideration for the short term carry-trade people, since it is the absolute yield differential, and the currency dynamics that would seem to matter most.br /br /br /strongSharp GDP Contraction/strongbr /br /Evidently the background to all this nervousness is last week's announcement from the economy Ministry that Russia’s economy may shrink by as much as 8 to 8.5 percent this year. Gross domestic product probably contracted by an annual 10.2 percent in the first six months and may slump at a 6.8 percent annual rate in the second half, according to the latest Ministry forecast.br /br /Behind this drop in GDP lies the fact that Rusia's exports were down by 47.4 year on year in the January to May period, largely due to falling prices for oil and raw materials. The economy ministry also said it expected capital investment to fall by around 21 percent this year as utility and energy companies, which account for about a third of total investment, cut spending programs. The ministry forecast is based on an oil prices scenario of an average $54 a barrel in 2009.br /br /Further, industrial production is expected to shrink between 11 percent and 13 percent as manufacturing falls by as much as 17 percent. Inflation of between 12 percent and 12.5 percent is forecast, down from last year’s 13.3 percent. And retail sales are expected to suffer an annual contraction of 5.8 percent.br /br /br /For the 2010 to 2012 period the ministry currently predicts a 1 percent expansion next year, followed by a 2.6 percent one in 2011 and 3.8 percent one in 2012. This “moderately optimistic" scenario would produce a deficit of 6.5 percent in 2010, followed by further deficits of 4 percent and 3 percent over the following two years. Government officials have recently stated they expect Russia to have a budget deficit of around 9% of GDP in 2009, up from an earlier 7.4% estimate. /ppstrongShort Term Indicators Show Continuing Contractionbr //strongbr /Industrial production shrank a record annual pace of 17.1 percent in May, while capital investment fell the most since December 1998, dropping an annual 23.1 percent.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/SlyURMtHAWI/AAAAAAAAOrs/WPgW0bb1YlY/s1600-h/russia+IP.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 235px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5358320679853162850" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SlyURMtHAWI/AAAAAAAAOrs/WPgW0bb1YlY/s400/russia+IP.png" //aRussian unemployment fell back for the first time in 10 months in May, but despite the positive effect this may produce on confidence the rate is sure to rise further in the months to come.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/SlyT-SMlH0I/AAAAAAAAOrk/EPJhf687ghA/s1600-h/russia+unemployment.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 201px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5358320354909822786" bor