Wednesday, 15 February 2012

Three AAAs and an AA+

Some weeks ago we had a storm in a nice cuppa as French politicians attacked the UK in frustration over Frances’s downgrade. They claimed that the British economy in all important aspects was worse off than the French economy. Rather unsurprising, the British government found the attacks unfounded. Back then I commented that there was something correct in the French criticism.

One big difference between the two countries is obviously that the UK has its own central bank and its own currency. Back then, the BoE had just announced a massive QE programme, and has later expanded the initiative further.

The problem is just that it has not worked. Moody’s is now on the prowl and has placed UK on a watch list for a downgrade. Apart from an outsized banking sector, UK has the quite dubious honour of belonging among the countries who saw the strongest growth in household debt in the past 15 years. UK consumers are busy repairing their balance sheets, curbing consumption as a necessary consequence.

This is the reason that well-intended expansionary policies from the BoE does not work. With slow growth it becomes a problem to curb the budget deficits. Again the rating companies are only pointing it out long after it became visible to the naked eye.

Another AAA country with a failing sense of reality took a couple of punches to the chin. Denmark is now on EU’s new watch list together with Bulgaria, Slovenia and 9 others. EU points to the fact that Denmark’s massive loss in competitiveness has led to significant loss of export market shares. At the same time, Danish household debt has grown strongly as consumers eagerly participated in the housing boom. Hence, the current deleveraging of household balance sheets handicaps economic growth. And that in turn creates problems in controlling the budget deficit.

Danske Bank’s outgoing CEO Straarup confirmed this situation in an exit interview. Danske sees strongly increasing losses on consumer loans as the housing bubble deflates. A shame that Straarup did not point this out earlier. But of course – once burned, twice shy. Straarup had to ask for emergency government assistance to save Danske in 2008, and he has kept a discrete profile ever since.

Nothing of all this should come as a surprise to the regular readers of this missive. I will venture into claiming that the only reason for Denmark not to be on a watch list for a downgrade is the massive improvement in public finances that happened before 2005. However, Denmark’s growth problem can end up becoming a serious problem of government balances.

Norway also holds the coveted AAA rating. It always helps a bit when you have no accumulated government debt. But all is not well in this country of oil and expensive vegetables. 

Recently several voices have pointed out that the country is in the grip of a major property price bubble. Most recently the head of the Norwegian FSA, Baltzersen, pointed out that the combination of a strong Krone and a property bubble creates a very difficult policy problem. Robert Schiller, the author of the Case-Schiller housing prise index for the US, pointed to the bubble in January.

The governor of Norway’s central bank, Øystein Olsen will speak on 16 February. He will likely concentrate on his area of responsibility, which includes the NOK, but not the house prices.

The situation becomes progressively more difficult for the government. The bubble is conflated by highly distorting tax rules. It makes it easy to deflate the bubble. It also makes it very easy to become highly unpopular among property owners. It is easier if one can blame the disaster on somebody else. But in this case, the government fully owns the problem.

The goings-on in the Republican race to nominate a challenger to President Obama make people say things that could otherwise create suspicions of use of controlled substances.

Romney has recently stated that the big 3 US carmakers would have been better off today without federal help in 2008/9. Let us just remember that two of the companies were in Chapter 11 and only survived because of capital injections from Washington.

One of the elements in the rescue plan was a dramatic reduction in pension liabilities. Pension funds received a large number of shares in the recapitalised companies as a compensation. Romney also criticised that one.

If he is to continue down that road, it would only be logical that he gets critical regarding the capital injections to the banks PLUS the fact that the federal government bought some 800 bn USD worth of “troubled assets”. 

The timing of that criticism is easy to get right. It will come when pigs fly.

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