Rejection & Resignation for Portugal

Interesting story that just happened yesterday. Portugal's prime minister resigned after his proposed austerity measures were voted down by the parliament. Now it looks even more bleak for Portugal and more likely that they will be forced to ask the EU and IMF for help.

Portugals Prime Minister Socrates
Source: bbc.co.uk

More about this story can be read on BBC News homepage.

I will be for sure very interested to see the outcome and if Spain is next in line begging for a bailout.

We won’t manipulate it

On Thursday night, the Yen hit the strongest position against the dollar since the Second World War. After a surge of around 4% in one hour, it was trading at dollar/yen 76.25. Many state that the strengthening of the Yen was caused by market perception of repatriation of investments going back to the Japanese financial market which many experts do perceive as a short term occurrence and speculation. The reaction from the financial minister Igarashi was swift and with the support of the G7 group an intervention in the market was done this Friday morning. The selling of Yen started with Bank of Japan and was followed up by Europe’s central banks, the Bank of Canada, and the Federal Reserve Bank of New York with an estimated 2 trillion yen ($25 billion) used. The rate of the currency fell to 81.36 at noon today. 

First intervention by the G7 since 2000

This was the first intervention in the market by Japanese authorities since November of last year. At that time the Yen had reached an all-time high of 82.88 the highest since 1995 however, the BOJ acted alone and sold off 2 trillion yen. For the G7 this was the first intervention in the Forex market in 10 years. The last time was in 2000 when G7 stepped in to intervene in the market for the Euro; this caused the Yen to weaken against all of its 16 most-traded peers.

What the G7 is hoping to do with this intervention and the strong message it sends to the market is to force investors out of long positions that have been taken against the Yen; a stable Yen will help boost the economy and exports now that domestic demand has collapsed due to the devastating earthquake that occurred last week.

BOJ and its stance with manipulation

Source: Top News

The finance minister was quoted this morning as saying: “We won’t manipulate it, but I hope that the yen goes back to where it was before the earthquake.” It seems odd to me that an intervention is just an adjustment back to a level that the government deems appropriate for the Yen to be valued at, and not the market. The BOJ also said that they will continue with powerful monetary easing to avert the economy slipping into a recession.

There are four different explanations that experts have developed to explain the increase in value of the Yen:

• Japanese insurance and finance institutions have started to bring capital back from abroad to fund the crisis situation
• Japanese households have started to bring home investments abroad to get a higher interest rate on their investment
• Outward flow of capital has diminished compared to previous levels
• Speculators have been forced to buy more Yen to fund their deals

Weakening the Yen

One may ask if this intervention is enough to weaken the Yen. Deutsche Bank has stated that Japan may need almost $500 billion to weaken the Yen and fight the forces that where driving it up. This estimation comes from looking at previous interventions as well as the size of the Forex market. If this is the amount that will be needed to stabilize the Yen, it will increase the debt burden by 10% and Japan already has the highest debt ratio in the developed world with over 220%.

The question that remains is: can Japan realistically stop the Yen from appreciating?

Make or Break for Japan

“The most expensive natural disaster”  - Reuters

Hefty cost on insurers

Source: The National

That is what experts say that the disaster in Japan is going to be. Insurance companies are expected to have to payout anywhere from 15 to 35 billion dollars as compensation, but this will not be nearly enough to cover everything. An early estimate of 100 billion is being thrown around, but many think even this is not enough to replace and rebuild everything the earthquake and tsunami destroyed. Replacing the infrastructure alone will be around $40 billion. Additionally, the escalating problems at the Fukushima Daiichi nuclear power plant where explosions have been rocking the nuclear reactors since the earthquake, has led to fears of radiation leaks and this has put the Nikkei index into a freefall. 

The first I heard about this catastrophe came on Friday morning when a guy asked me if I’d heard about the tsunami.  He then proceeded to tell me:

“If you have anything invested there you should sell it now.
The market will go into a free fall.”

Market reaction

A massive drop occurred on Tuesday after the already significant drop on Monday of 6.2% (the first trading day after the disaster). The index dropped by 10.55% or 1,015.34 points and ended up at 8,605.15. The Nikkei index was also down Tuesday hovering on the 8,227 mark.  To help stabilize the market, the Bank of Japan pledged on Sunday that they would pump 15 trillion yen ($183 billion) into the economy to reassure global investors about the stability of Japanese financial markets and their banks. This is almost five times what was put into the market after the Lehman collapse in 2008 and they are offering to buy an additional 3 trillion yen of government bonds.

Forecast is bleak

Biggest investment bank in Japan, “Nomura”, has forecasted that the recovery of the economy is now going to be delayed by at least six months and that the GDP growth figures will most likely flat-line for the rest of the year. Previous expectations were that the economy would expand by 1.4% in the second quarter this year. Also, the world economy is probably going to be affected with increased inflationary pressure and short-term stimulus for the recovery.

Source: CIA World Fact Book

Unsustainable

Japan already has one of the highest debt ratios in the world and will surpass 233% of the GDP in 2012. This is an unprecedented rate and Japan is the only country gaining such a high level of debt during peace time. Japan already got a downgrade on its rating in January, how will they fair now with the rating agencies? Japan’s financial minister has stated that the agencies should give leeway to the Japanese finances due to the crisis.


For years experts have said that the economy in Japan needs a more significant boost to push it out of the deflationary cycle that it has experienced since the financial collapse in the ‘80s.  It is a hard point to make, especially in light of the recentness of the catastrophe, but maybe this could give Japan’s fragile economy the chance to push itself out of its decade-long economic stall and regain its position as a strong financial player. A darker path could be that this catastrophe will break the Japanese finances and push it further down the spiral of economic contraction and stagnation; a spiral it would then never be able to lift itself out of without default.

The Return of the Vikings

Could the Swedes have found the light in the dark abyss that the western countries plummeted into after the financial crisis in 2008?

Graph shows the changes in GDP since 2007

Source: Government Offices of Sweden

Explosive growth
Last week Sweden’s Statistical Bureau posted last year’s quarterly GDP growth figures and to everyone’s surprise it was much stronger than what experts had predicted. A record growth of 7.3 % was achieved and it has never been that high since recording began in the ‘70s. The huge rise is partially explained as a recoil from the severe dip the Swedish economy took in 2009. But I think those are still some amazing growth figures from a developed western economy and that makes me proud to be Swedish (despite not living there for 3 years now).

Recovery already reached

Anders Borg
Source: sverigesradio.se

In a year, Sweden has already recovered the GDP drop and is now heading with full force into 2011. By looking at the graph above one can see this very clearly: Sweden is the blue line, the Euro area is red, and the US is demarcated in green. Experts predict the growth of the year to be over 4% with the finance minister Borg optimistically predicting 4.8% growth.  It is expected that the unemployment rate will drop to around 5% in the next 3 years.  Having an export-oriented and open market to the world is can be seen as a drawback and it makes us much more vulnerable to the changes in the world economy; sharper drops, but steeper climbs which we can clearly see now. Despite the view by many of Sweden as the totem of socialism, our country has a liberal-oriented market. We have a more liberal market than Germany and Belgium and we’re one of the few that actually became even more liberal during the financial crisis, when so many others turned to protection. The truth is that Sweden was, and almost always had, a liberal market.

How many other countries in Europe can report their budget’s heading into a surplus? Even the state review agency had concerns about the forthcoming predicted surpluses in the coming years. They wanted to know what the government had planned to do with it! How many other countries have this problem? Possibly China, but not many others I would say.

Has the country up in the cold north found the way out of slumped growth and persistent unemployment? Maybe the world could learn a thing or two from this remote part of the world where the Viking once came from.

First draft

Just want to welcome you to my new blog that I’m doing in part with a class at university. I’ll write about topics that interest me and things that happen in the global economy and financial markets during the next few months. I have never done this before so let’s see together what this little project will produce at the end.

Source: Dilbert.com

So I have nothing more to say than… here we GO!