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Showing posts with label Eurozone. Show all posts
Showing posts with label Eurozone. Show all posts

Tuesday 17 June 2014

China surpasses US as world's top corporate borrower; Will the IMF headquarters move to Beijing?

China surpasses US as world's top corporate borrower



The Chinese mainland has surpassed the US as the world's top corporate borrower, and higher debt risk in the world's second-largest economy may mean greater risk for the world, a report said on Monday.

However, Chinese economists noted that the debt risk in China's corporate sector is still well under control.

Nonfinancial corporate debt in the Chinese market was estimated at around $14.2 trillion by the end of 2013, overtaking the $13.1 trillion debt owed by the US corporations, a progress happening sooner than expected, said a report from the Standard & Poor's Ratings Services on Monday.

The report expects that by the end of 2018 debt needs of mainland companies will reach $23.9 trillion - around one-third of the almost $60 trillion of global refinancing and new debt needs.

"It [the mainland surpassing the US as the largest corporate borrower] is not surprising at all, as the [size of] mainland non-service sector has already surpassed that of the US," Tian Yun, an economist with the China Society of Macroeconomics under the National Development and Reform Commission, told the Global Times on Monday.

Cash flow and leverage at mainland corporations has worsened after 2009, and debt risks in the property and steel sectors remain a particular concern, the report said.

Private companies are facing more challenging financing conditions - highlighted by China's first corporate bond default case of Shanghai Chaori Solar Energy Science and Technology Co in March and another case of default of leading private steel maker Shanxi Haixin Iron and Steel Group.

"The capital market has been sluggish during the past few years, leading to the fast growth in corporate debts," Xu Hongcai, director of the Department of Information under the China Center for International Economic Exchanges, told the Global Times Monday.

Experts noted that the rapid growth in debt reflected some problems of the  Chinese economy, but the size of the debt is still in a safe range and will not cause major risks as the economy remains stable.

"The problems of the Chinese economy are institutional and structural," Tian said, "By addressing these issues, debt risks can be managed."

Tian further noted that most corporate debts in China are internal debts, thus debt problems in the country will have limited impact on the rest of the world.

The report also said a possible contraction in "shadowing banking" will be detrimental to businesses as general.

But Xu noted that China's tighter supervision of the "shadow banking" sector will make it more transparent and better-regulated, which will reduce the potential risks in the sector.


Local governments face massive debt repayment pressure

China's local governments are facing huge debt repayment pressure this year with 2.4 trillion yuan ($390 billion) of debts due in 2014, China Business News reported Monday.

From 2009 to 2013, China issued 94 local government bonds raising 850 billion yuan, the report said.

With another 400 billion yuan worth of bonds to be issued this year, the total financing since 2009 will reach 1.25 trillion yuan, according to the report.

However, the total local government debt is much higher than the amount raised through the bonds, the report said, noting that major debt came from bank loans.

Although the central government has stated several times that the overall debt risk is under control, the statistics from China's National Audit Office show that some local governments have a debt-asset ratio of more that 100 percent and are facing huge repayment pressure, the report said.

Market analysts hold the view that local governments may borrow new debts to pay for the old ones.

The central government allowed local authorities to raise funds since 2009 in the wake of the global financial crisis, while the central government also issued bonds and repaid debts on behalf of the local governments, a practice criticized by some as not conforming to market economy principles.

As the bond issuing backed by the central government is limited and could not fully meet the local needs, the local governments also turned to opaque financing channels including shadow banking activities, the report said.

Despite the big debt pileup, no local government default has so far taken place.

- By Liang Fei Source:Global Times Published: 2014-6-16 23:43:09 

Will the IMF headquarters move to Beijing?


The International Monetary Fund's headquarters may one day move from Washington to Beijing, aligning with China's growing influence in the world economy, the fund's managing director Christine Lagarde said early this month.

Attaching importance to China

Christine Lagarde made the statement at the London School of Economics and Political Science (LSE), saying that the IMF rules require that the institution should be headquartered in the country that is the biggest shareholder. This has always been the U.S. since the fund was formed.

"But the way things are going, I wouldn't be surprised if one of these days, the IMF was headquartered in Beijing," she said.

Lagarde remarked that the IMF had a good relationship with China, the world's second largest economy, and she praised the Chinese government's commitment to fighting corruption.

Lagarde added that she did not think the IMF should be controlled by Europeans in its first place. Since its establishment in 1945, the IMF headquarters has been headed by Europeans and located in Washington, while the World Bank has been headed by the Americans.

Not satisfied with the U.S.

Lagarde also pointed out that the U.S. government is an "outlier" among the G20 in refusing to approve IMF reform, and the IMF was trying to give emerging economies like China and Brazil a bigger voice through reform.

According to Lagarde, on the part of countries like China, Brazil, and India, there is frustration with the lack of progress in reforming the IMF by refusing to adopt the quota reform that would give emerging economies a bigger voice, a bigger vote, and a bigger share in the institution. “I share that frustration immensely,” she said.

She also claimed that the credibility and the importance of the IMF are closely related to proper representation among the membership. "We cannot have proper representation of the membership if China has a tiny share of quota and the voice, when it has grown to where it has grown," she said.

The IMF agreed to reform its management structure in 2010 so that emerging economies could play a bigger role, and made China the third largest member. The U.S. is the only member with control weight in the voting; meaning that any major reform must be approved by the United States.

Hello headquarters

Lagarde has no specific schedule for the headquarters' shift. However, this once again reminds China that there are few international organizations headquartered in its country, which is disproportionate to China's status as the world's second largest economy.

This article is edited and translated from 《IMF总部要搬北京?》,source:Beijing Youth Daily, author: Bu Xiaoming. (People's Daily Online)

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Sunday 20 May 2012

Debt crisis in Europe will affect rest of the world

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

Eurozone crisis: high-stakes gamble as David Cameron warns Greek voters.
David Cameron and European Commission president José Manuel Barroso talk before a session at the Nato summit in Chicago. Photograph: Pablo Martinez Monsivais/AP

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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

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

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

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

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

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

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

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

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

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Wednesday 2 May 2012

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


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

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

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


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

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

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


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

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

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

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

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



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

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

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Eurozone manufacturing heads towards recession

 Greece-EU

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Saturday 10 March 2012

Moody's declares Greece in default of debt

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



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

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

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

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

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

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

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

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

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

Source: Agencies  Newscribe : get free news in real time

Friday 16 December 2011

The new Euro deal – not the whole bazooka


What Are We To Do by LIN SEE-YAN

 Link between joint liability of debts and good behaviour is missing

AP Photo logo AP Photo  A beggar sits in Via Montenapoleone shopping street in downtown Milan, Italy, Tuesday, Dec.13, 2011. Further signs of stress emerged Tuesday to indicate that Europe's most recent summit agreement to get the euro countries to bind their economies much closer together has only made limited progress in pulling the continent out of its debt crisis. While figures showed that Europe's banks parked more money at the European Central Bank than they have at any other time this year, Italy's borrowing rates in the markets ratcheted even higher and back towards the levels that forced Greece, Ireland and Portugal into seeking financial bailouts.

The euro “Merkozy” deal agreed last weekend targeting deeper euro-integration was a step in the right direction but did not offer the big bazooka that could really ease market tension. It's only part of the solution Europe badly needed: it's not even the solution markets are waiting for.

So far, wanting “more Europe” has come slowly, and grudgingly; but crucially, lacked proper leadership to deal with a truly systemic crisis. What's paralyzing the euro-zone is a flaw buried deep within the monetary union's structure what one writer identified as “the unresolved conflict between the needs of the euro and the independence of its members.” Put differently, the link between joint liability of debts and good behaviour is missing.

Looking back, all those wasted years of skirting the underlying problems, causing rising budget deficits and building massive debt exploded in late 2009 when Greece first toppled into crisis. The euro-zone tried to stanch the problem with a bailout in May '10 to no avail because Greece is bankrupt; and did nothing to squelch contagion. By this summer, Ireland and Portugal had collapsed into bailouts as well; with Italy and Spain now at risk of default.

Leaders had pressured countries into gut-wrenching austerity and reform arrangements to stabilise their debt and cut deficits in the hope of rebuilding investor confidence. That strategy failed. Other agreements have also drifted. The 2nd Greece bailout in July came to naught, while the plan to boost the firepower of EFSF (European Financial Stability Facility) has since faltered.

Frustration is building. It culminated in last week's summit, with high hopes to marshal the might of the entire euro-zone a US$13bil economy to provide an extinguisher powerful enough to put out the debt fire. But all it did was inject more painkillers; not a cure.

The new deal bears the hallmark of yet another in the series of half-measures that doesn't address increasingly vulnerable banks; or go far enough to instil confidence in the euro-zone's battered debt markets; and certainly didn't convince S&P from putting the debt of 15 European economies, including Germany, on negative credit watch, and Moody from cutting the credit ratings on France's top three banks. Sure, there has been progress but not enough to provide a defining resolution. Leaders are flirting with risk as Europe is going into recession. We have seen this movie before. The deal involves a promise by everyone to be a little more German about their spending and debt. The consensus now is that the 17-nation euro-zone bloc's GDP growth will contract by up to 1% in 2012, sharply below this year's already poor growth of 1%.

There was little in the deal to address the drastic loss of investor confidence. Euro-zone borrowing costs have resumed rising this week. Stock markets have retreated after an initial relief rally as optimism faded. The euro had since sunk below US$1.30, some 12% from its peak in May. The new “comprehensive” set of measures making-up the euro-zone's “fiscal compact” failed to calm markets; it included the following:-

  •  Constitutional amendment to balance the fiscal budget. The European Union's (EU) Court of Justice would verify that each country had a compliant debt brake in its laws, but with no oversight from Brussels.
  •  The new “stability union” will adopt a “golden rule” to ensure structural deficits (i.e. adjusted for boom and bust of economic cycles) below 0.5% of GDP. For breaching the 3% of GDP deficit limit, nations will suffer “automatic consequences,” unless member states vote to block them.
  •  The 500-billion-euro European Stability Mechanism (ESM) to replace the existing bailout fund (EFSF) will be set up in March '12 (instead of 2013).
  •  A 200-billion-euro contribution to the IMF (International Monetary Fund) for on-lending to enhance the firepower of ESM to help Europe.
  •  No more “hair-cuts” for private holders of dodgy euro-zone sovereign debts.
  •  New treaty to change EU's foundational pacts. With UK's rejection, 17 euro countries and up to 9 of 10 EU nations not using the euro will form a separate pact outside the EU structure.
Prior to the summit, ECB took two decisive steps to shore up the euro-zone: cutting interest rate to a record low of 1% to soften the looming recession, and crucially extending longer-term liquidity to Europe's cash-starved banks. Reserve ratios were also lowered. But ECB managed to avoid mounting pressure to buy more troubled states' bonds.



As I see it, on the moral hazard side, there is no multi-trillion bail-out funds and no promise by ECB to become lender of last resort to monetise everyone's debt, at least for now. However, the use of the European Court of Justice as final arbiter of rectitude is far from persuasive. Much of the new deal is reflective of the failed “stability and growth pact” that was around when the euro was launched, and which both Germany and France breached shortly thereafter.

Such rules will inevitably be broken because when it comes to fundamental rights to tax and spend, governments will always follow the dictates of national electorates rather than Brussels. No court has the political legitimacy to confront Italian or French unions when there is social unrest in the streets over budget cuts; the court won't have the stomach to enforce its decisions. When German rectitude faces Italian or Spanish politics, we know who will get the upper hand.

Yet, for me, the irony is that EU had already agreed less than three months ago to rules that do much of what the new deal is now seeking to accomplish. They did so without having to endure the ordeal of changing EU treaties. The “six pack” arrangements were approved after nearly a year of tortuous negotiations. In broad strokes, they would have already established the framework of a more integrated EU.

How to revive confidence? The big problem lies in economic growth, or the lack of it. Most Europeans still believe in the direct linkage between spending and economic growth. So, the balanced budget requirement will work only with tax increases eternally matching higher spending. This implies a “long-term austerity gap.” As of now, Europe needs major spending cuts and fiscal reform. But politicians outside Germany are hoping ECB will eventually come to the rescue. At present, the ECB stands firm and won't play ball. So the political pressure mounts.

The new deal simply means continued austerity in the euro-zone's periphery without any offsetting impact of devaluation or stimulus at the core. Unemployment already at 10.3% will continue to rise, placing pressure on households (and youths in Spain, youth unemployment approaches 50%), governments and banks. Anti-European sentiment will continue to grow, and populist parties will prosper. Violence and social unrest will prevail.

Unfortunately, the new deal has no place for institutional changes to avert such a scenario. I am afraid if such changes are politically not possible, then the euro is doomed. It's a matter of time. As post '08 record shows, the biggest deficit in Europe these days is in ideas to spur growth and in the lack of political will to enact them. Already, in France, its Socialist Party presidential candidate is picking up on this undue emphasis on austerity; stressing Europe's need for growth to get out of the crisis: “if there is no growth, none of the objectives will be reached.” Alas, Europe's present leadership seems to have no stomach for this option. So I am afraid we are stuck with more summit sequels and the certainty of more uncertainty. Investors' confidence will not return.

Looks like the euro-zone firewall still looks inadequate. As of now, plans to leverage the EFSF are mired in technical details. The combined size of EFSF and ESM is capped at an insufficient 500 billion euro. An infusion of 200 billion euro through the IMF is not game changing. Even so this measure is controversial.

ECB has indicated that earmarking is illegal. Moreover, IMF's shareholders aren't uniformly keen about directing cash to rich Europe. The US has parliamentary problems; so do Germany, Austria, Czech, Poland and Ireland, not to mention Holland and Finland. Pressure by S&P to downgrade and by Moody's, including denying the likes of France AAA rating, has been priced-in to some markets. Nevertheless, there is still potential to shake prices. Further definite downgrades will take another leg down. Moreover, euro-zone is facing significant risk of a recession next year and a credit crunch. Another shock may be needed to get European politicians to all read from the same page.

Already, euro-zone also faces imminent acute funding problems. Member states need to repay over US$1.2 trillion of debt in 2012, mostly due in first half-year. In addition, European banks, heavily dependent on state largesse, have US$665bil of debt coming due by June '12.

On Germany's insistence, ECB won't be allowed to unleash US-style quantitative easing or heavily buy up bonds or even issue euro-zone bonds which I consider critical. Many believe Germany will eventually relent. Its Chancellor has political problems. So, euro-zone's big test still lies ahead. One thing is clear. The market is weighing in. So long as Spanish/Italian bonds cost more than 6%, the crisis is not fixed; confidence has not yet returned. The refinancing calendar of Europe's sovereigns is onerous. Pressure will continue to be daunting as long as ECB is not lender of last resort.

The real problem is Europe's banks remain locked-out of traditional funding markets, leaving them reliant on ECB which is playing it cool. Faced with funding freeze, banks will shrink their balance sheets and strangle growth by not lending. The situation is serious. Euro-zone banks can't raise cash and won't lend to each other because of counter-party risk. On top of it all, last week's “stress tests” suggested Europe's banks are short of 115 billion euro (up from 106 billion euro in October). No one knows who is really solvent anymore.

For Asia, the growing uncertainty is killing. The series of sequels following each European summit leaves a trail of deals, but not the cure. Investors are growing more nervous in the face of rising risk of recession. As the economic outlook for Europe worsens, Asia's exporters will experience and expect continued weakening demand. Most exposed will be trading hubs like South Korea, Hong Kong, Taiwan & Singapore. In 2010, Korea's exports were equal to 45% of GDP, with Europe as its second largest importer. But regional powerhouses, China, Japan and India, are also taking a hit. China is most exposed. Exports accounted for 36% of GDP in 2010 and Europe is its biggest destination (19%). So far, their huge domestic market has shielded them from Europe's lack of growth, more than their smaller neighbours.

Export focus also matters. European slowdown is already affecting services exports from Hong Kong and Singapore. More cautious consumers in Europe undermine demand for Korean and Taiwanese consumer electronics. China's dominance at the lower end of the value chain is largely immune to shifts in the economic cycle. But what's worrisome is the continuing kick-the-can-down-the-road attitude of Europeans which works to prolong the crisis, and translates into reduced investment and employment in manufacturing capacity. The longer the crisis is left unresolved, the worse the impact on Asia.

Lord Keynes wrote in 1921: “about these matters the prospect of a European War, the price of copper 20 years hence there is no scientific basis on which to form any calculable probability whatever. We simply do not know.” And Keynes is right. While the euro enjoys widespread support, spending more money to save it doesn't.

Germans resent seeing their hard earned cash diverted to rescue Greeks, perceived to be irresponsible. Recent polls show that more than 50% of Germans reject euro-bonds, and 59% oppose further bailouts. We are now stuck with the classic dilemma with austerity politics bringing no growth and no framework for common financing, continuing political intransigence has left politicians with the option to continue kicking-the-can-down-the-road. Like Keynes, we just don't know how and how far euro-zone politicians will go towards assuming joint liability for debts (euro bonds). At some point, Europeans have to make the fateful choice between national sovereignty and the euro's well being. Time is of the essence for a real breakthrough. In his recent book, Harvard's psychologist Steven Pinker argues that mankind is becoming steadily less warlike and predicted that “today we may be living in the most peaceable era in human history.” For now, Pinker offers comfort that we won't go to war over it he is right.

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