The response of authorities to the latest stage of the crisis, where fears have moved on from individual company balance sheets to country balance sheets, has been very different. The U.S. introduced quantitative easing (QE) and the UK followed suit, while Europe did very little.
While the European Central Bank has purchased European Sovereign bonds, this has been limited in size and, unlike the U.S., the ECB has attempted to sterilise all purchases by taking liquidity out away from banks in other ways.
The EU responded to the peripheral crisis in May by enacting a bailout for Greece and developing a structure that could be used for other sovereigns. However, the EU also recognised the need to address the core of the problem of rising deficits and ballooning Debt/GDP ratios driven by fiscal profligacy in the good times, and not merely slower economic growth. The latter has shown up the unsustainable nature of the former, rather than actually causing it.
Therefore the EU response has been to ensure liquidity is available on condition of fiscal reforms to address the underlying problem. The result is spending cuts in most European countries with, Ireland now on its second austerity budget and among other reforms, long-needed tax reform in Greece and labor reform in Spain. Even the UK has now introduced a big fiscal austerity package.
What is clear is that the European Core - especially Germany - who have run a better balanced economy for years and suffered with slower growth in the boom times, are now re-asserting their own fiscal orthodoxy.
The Maastricht criteria was ignored during the crisis but was a key part of the original Euro creation to help the stability of a currency union that was not backed by political and fiscal union. A return to Maastricht budget deficit of 3 percent is a long way off, but the basic principles are being re-established.
In contrast, the U.S. response seems to have been to do whatever is needed to stimulate growth and jobs and worry about fiscal issues later.
The latest example is QE2 with the Fed effectively printing more money and the dollar responding accordingly. The surprise is that bar a recent move, this strategy has not resulted in higher bond yields as the U.S. Treasuries have continued to benefit from a flight to quality.
While there is general acceptance that QE1 was broadly beneficial in early 2009 for an economy on the brink of depression, there is much more scepticism of the benefits of QE2. One risk identified by numerous commentators is increased levels of tensions with international trade partners. One of the likely effects of QE will be to weaken the dollar and China has already been heavily critical of what it sees as an irresponsible and dangerous monetary policy. Other countries for example in Latin America have imposed capital controls to limit “hot money” flows out of dollars and into their own currencies.
Despite the benefits of QE1, the overall response of the economy in terms of growth and employment was disappointing. The reason was that QE failed to address the problem of lack of demand for credit as borrowers everywhere concentrated on restoring their own balance sheets.
In this environment, artificially lowering bond yield does little to encourage borrowing. At the same lending institutions are reluctant to increase loans. Banks are still generally very cautious on the outlook and are keen to keep liquidity. At the same time the introduction of new capital rules for banks means there is still doubt on future capital requirements with the only certainty being that it will be higher than before. This deadlocked scenario is known as a “liquidity trap,” and QE2 is therefore unlikely to make any bigger impact on these problems than QE1.
In short the crisis was caused by a sustained period of ever-increasing leverage with little attention paid to risk or understanding of the underlying assets.
The European response has been perhaps slower than the U.S., but has generally been characterised by ensuring that there is sufficient liquidity available to ensure that economies function where the markets are unable or unwilling to provide this.
At the same time Europe has addressed the issue of over-leverage by forcing the introduction of fiscal austerity and much need labour and tax reforms.
The U.S. approach has been to address the issue of over-leveraged consumer and corporate balance sheets by massively expanding the Fed balance sheet and continue to issue Treasuries in ever larger amounts to drive growth - leaving concern about the U.S. debt burden to a time when growth is once again strong.
Hong Kong, China (CNN) – The conflict may be between the two Koreas, but this latest clash between the North and South is a major cause of concern across the world, shaking markets in the U.S. and elsewhere.
North and South Korea artillery exchanged fire for an hour on Tuesday. The attack on Yeonpyeong Island was the first direct artillery attack on South Korea since the 1953 cessation of hostilities.
The Dow Jones industrial average fell 142 points, or 1.3%, to close at 11,036 on Tuesday. The S&P 500 fell 17 points, or 1.4%, to 1,181. The Nasdaq slid 37 points, or 1.4%, to 2495, CNNMoney reported – a sell-off sparked by the crisis in Korea, as well as continued concerns over Europe’s debt crisis and a grim outlook by the U.S. Federal Reserve.
Yet underneath the panicked selling, something new can be seen in South Korea’s financial response to this latest crisis.
As President Lee Myung-bak assembled a meeting of South Korean leadership in a bunker underneath Seoul, the country’s top economic policymakers also met in emergency session within hours of the strike. They issued a statement that the government stands ready to tap its foreign reserves in case panic dries up liquidity in the Korean markets.
"Timely action will be taken if excessive herd behavior is detected ... and the Bank of Korea (is) set to cooperate on stabilizing the market," the finance ministry said in a statement after the meeting, according to state news agency Yonhap.
The result? Although the value of the won cratered overnight, dropping to 1,170 to the dollar from its 1,125 Tuesday close, within an hour of markets opening on Wednesday the won was back up to 1,145.
The worst market reaction to Korean Peninsula tensions was in October 2006, when North Korea detonated a nuclear weapon underground, said Kwon Goohoon, co-head of Korean research at Goldman Sachs in Seoul.
“At that time the Korean won weakened sharply and took 13 days to recover,” Kwon said. The Kospi Index, Korea’s primary stock market, took five days to recover.
“This time, despite the seriousness of this particular, the market seems to be more confident,” Kwon said.
The government’s financial response to the shelling came much quicker than past crises, Kwon said. “I think there’s been a learning curve, given the volatility over the last two years in context of the subprime crisis,” Kwon said of the proactive steps Korean policy makers took to calm investor worries.
So it could have been much worse. But there remains one unknown.
“If there is no further provocation, we expect the markets will stabilize,” Kwon said. “The only concern right now is how North Korea will react.”
Former U.S. "car czar" Steven Rattner talks about jumpstarting the U.S. auto giants. CNN's Felicia Taylor reports.
CNN's Maggie Lake looks at the pros and cons of buying stock in the "new" General Motors.
There was plenty of grist for the rumour mill this past week, as the Irish government sheepishly admitted that a bailout for its banks may be a wiser option after all.
A side-car victim of the Ireland’s lending crisis is the hotel and leisure group Maybourne, which is saddled with $1 billion of debt about a fifth of which needs to be paid off near-term. The name Maybourne probably does not ring a bell for most, but its hotel properties certainly will. The 5-star luxury hotels Claridge’s, the Berkeley and the Connaught are all about a mile apart from each other in prime London locations, but behind the opulent appearances is a small mountain of debt.
Enter the Qataris - more specifically the two powerful Sheikh Hamads - one the Emir, the other his cousin the Prime Minister. They are the tacticians of a handful of Qatari investment vehicles that have a penchant for Britain. Advisors behind the throne are indicating interest and their track record once leaks appear are pretty accurate.
It has been a busy year even by Qatari standards. This time last year the U.S. Embassy was snatched up for an undisclosed sum. Once the United States vacates the premises, there are plans to turn the Grosvenor Square property into a luxury hotel or flats or both. Back in May, the Egyptian owner of Harrods could not decline the premium being offered for the Knightsbridge institution. Those trophy properties followed stakes in J Sainsbury, the London Stock Exchange, Barclays Bank and Chelsea Barracks.
The rapid pace of deal making initially raised some eyebrows in the City of London, but now each acquisition seems almost commonplace. Britain left Doha nearly four decades ago during the handover, but Qatar won’t be leaving London anytime soon. The Emir also spent a cool $150 million for a luxury flat in Knightsbridge. It all makes sense. He wanted the luxury store in the same neighbourhood as his part-time residence.
As a banker familiar with the Qatari Royal family noted, they like to make purchases at a discount (Barclays) or to buy trophy assets (Harrods). In the case of Maybourne’s portfolio it may be able to do both.
This may sound a bit odd for those of us making a decent living in that wide swath of the middle class, but Qatar cannot keep pace with the funds flowing into government coffers. There are just over a million people living in Qatar - a third of whom are Qatari nationals. The tiny state - which is playing a huge geo-political game - is producing the equivalent of nearly five million barrels a day in liquefied natural gas. It has the third largest proven natural gas reserves and is right near the top in the per-capita income league at nearly $90,000 and growing by the day. That is a lot of energy production for 300,000 people.
There is a certain irony in all this. When oil prices collapsed during the late 1980s and early '90s, Qatar nearly went bankrupt. The Emir - after nudging his father from power - took a huge gamble, invested heavily in gas to liquids (GTL) technologies and now has a fleet of 54 tankers servicing markets from Asia to Latin America. His pay-day has come.
While the two Sheikh Hamads make headlines with their high-profile moves in Europe (let’s not forget Porsche and Credit Suisse) they are busy pursuing deals in emerging markets as well. While I was covering the World Islamic Economic Forum in Kuala Lumpur last spring, the Prime Minister inked a $5 billion agreement to invest in property and energy projects in Malaysia. He signed a $1 billion MOU in Indonesia and the Qataris are frequent visitors to Brazil and Russia - two members of BRIC, key players on the energy security front and highly populated markets with growing influence.
Qatar, as they say in boxing parlance, is punching above its weight and this match is just getting started.
I am in Kenya filming Marketplace Africa. When I arrived here, the first thing I did was to turn on the television set in my hotel room and watch the local news.
KTV was running a story on how the Anti-Corruption Commission was planning to set up a “corruption curriculum” in Kenyan schools, where there would be a focus on “integrity studies.”
I was both amused and dismayed – what exactly are integrity studies?
According to quotes from the press conference, the Commission hopes to set up clubs – known as “Adili” – in all schools, to reach young primary school children, right up to university-level students. The idea is that more than 10 million children will “discuss moral and ethical choices and dilemmas which they encounter daily both in their personal and communal lives.”
Obviously, the intention is honorable. Kenya has high rates of corruption (according to Transparency International, only 19 countries in the world are perceived as more corrupt than Kenya) and so it seems the authorities hope that by teaching “integrity” to schoolchildren graft will lessen.
But reducing corruption in Kenya could be harder than simply teaching children “integrity.”
We filmed in Kibera slum, where more than one million people live, and many people I spoke to there say you can’t get through the month without paying a protection fee, a backhander for water or electricity, a property tax, and all sorts of other hidden “costs” associated with surviving in one of Africa’s biggest slums.
Children will learn, way before they get to school and have to sit through honesty lessons, that to make your way in the world, in a tough, poor society, you have to learn to work the system, maneuver and make deals. That’s the reality. Tough choices, indeed.
So my question is – how do you root out corruption when it is so endemic? Is the Kenyan Anti-Corruption Commission wasting its time? Or is this a clever way to instill “integrity” in future generations of government ministers or police officers?
CNN International correspondent Ayesha Durgahee was honoured last night when she was awarded Business Travel News Journalist of the Year at the 2010 Business Travel Journalism Awards.
At a ceremony at The May Fair Hotel last night, Ayesha won for her CNN report on the quality of cabin air on flights.
On Ayesha’s winning entry, the judging panel, chaired by Dominic Ponsford, editor of the Press Gazette, said: “The panel was extremely impressed with Ayesha’s piece on ‘Aero-toxic Syndrome’ highlighting how air supplies onboard aircraft can become toxic and cause crew, pilots and passengers to become very ill. The piece gripped the judges who described it as ‘an international scoop ... a very strong story, and one that could and should be picked up by the wider media.”
The judges also praised her use of graphics, copy, in-depth interviews with scientists and grounded pilots, plus pieces to camera throughout the piece.
Ayesha beat the following in her category:
Deborah Rayner, managing editor CNN Europe & Africa said: "Congratulations to Ayesha from all of us at CNN. Aviation and travel issues have played such a huge part in our coverage in the past 12 months, so to be recognised in this way is fantastic. Ayesha is an exciting new talent, who has a very bright future ahead of her."
The awards, now in their seventh year, seek to recognise and reward the very best in business travel journalism. Organised and promoted by Carlson Wagonlit Travel, the 2010 awards emphasise the achievement of individual journalists.
The judging panel members included journalists as well as business travel managers and industry experts.
A full list of winners can be found here.
Hong Kong, China (CNN) – The lines among corporate espionage, cyber protection and national security seem to be blurring in a raft of news out in the past 24 hours.
The head of cyber security for the U.S. Department of Homeland Security told a government panel that the July release of `Stuxnet,’ which first attacked Iran’s nuclear power plants in July, was a “game changer.”
"This code can automatically enter a system, steal the formula for the product you are manufacturing, alter the ingredients being mixed in your product, and indicate to the operator and your anti-virus software that everything is functioning as expected," Sean McGurk told the Senate Homeland Security Committee.
Computer antivirus maker McAfee released a report Wednesday said the Stuxnet worm “marked a beginning of a new era.”
The report said Stuxnet was the first malicious software, or “malware,” that targeted industrial control systems, “anything from a pizza oven to an oil rig.” The report said the sophistication of the worm indicates the perpetrators were well-moneyed; who remains a mystery. The virus had a marker that matched the date of the executive of a Jewish-Iranian business person, but added “this could be highly misleading or even a false path.”
Still, even if it were a targeted attack against Iran, the collateral damage is immense, infecting “thousands, if not millions” of computers worldwide.
“The damages Stuxnet causes will certainly dwarf those intended by the authors,” the report said.
Now accusations that China Telecom ‘hijacked’ 15 percent of U.S. web traffic last April, according to a U.S. Congressional report. The report said China telecom redirected the web traffic through China for 18 minutes. Sites impacted included all branches of the U.S. military, the U.S. Senate and NASA.
The report doesn’t know if the diversion was intentional, whether Beijing played any role, or whether sensitive data was compromised. Both the Chinese embassy in Washington and China Telecom denied the charges.
Regardless, the raft of reports indicates the heat of cyber threats is rising across borders, across industries and across computers.
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