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Rearranging the New World Order

Reckoning today from Baltimore, Maryland…

The new Japan is China. It’s an export economy with too much capacity…like Japan in ’89.

The new Greece is Spain. It’s got mortgage debt up the kazoo…

The new Ireland is the old Ireland. Yes, Ireland is now exporting people again…at the fastest rate since the 19th century.

Our old friend Jim Davidson says the new America is Brazil. But what happened to the old America? It’s the new Argentina. Whoa! What a topsy-turvy world! The US is going broke…and going rogue. Just like Argentina in the ’80s…

The story on China, from The New York Times:

HONG KONG – China announced Thursday that growth in imports had unexpectedly come to a screeching halt in April – rising just 0.3 percent from the same period a year earlier, compared with expectations for an 11 percent increase. Businesses across the country appeared to lose much of their appetite for products as varied as iron ore and computer chips.

China has been the largest single contributor to global economic growth in recent years, and a sustained slowdown in its economy could pose problems for many other countries. Particularly exposed are countries that export commodities like iron ore and oil and depend on demand from China’s voracious steel mills and ever-growing ranks of car owners.

Exports, a cornerstone of China’s torrid economic growth over the past three decades, grew only 4.9 percent last month – half as fast as economists had expected. And a slump in new orders over the past month at the Canton Fair, China’s main marketplace for exporters and foreign buyers, suggests that overseas shipments by the world’s second-biggest economy, after that of the United States, may not recover quickly.

Growth in other sectors appears to be slowing, too, particularly in real estate. Soufun Holdings, a Chinese real estate data provider, released figures Monday showing that residential land sales in the country’s 20 largest cities had fallen 92 percent last week from the week before, as declining prices for apartments have left developers short of cash and reluctant to start further projects.

There are early signs of a credit crunch, at least among private sector companies. Many seem to be asking their suppliers for more time to pay debts and complaining of cash flow problems. Zhang Jinmei, the sales manager at Qitele Group, a company that makes playground equipment in the coastal city of Wenzhou, said that local investment and lending pools there were starting to charge higher interest rates for loans, a sign of worries about creditworthiness.

“The business environment is getting tougher and tougher,” said Tom Zhang, the sales manager at Hebei Haihao High Pressure Flange and Pipe Fitting Group. “Competition is very intense to get more business – our domestic sales are down from last year, though our export sales are more or less stable.”

And here’s the lowdown on the pain in Spain from Bloomberg:

Spain is underestimating potential losses by its banks, ignoring the cost of souring residential mortgages, as it seeks to avoid an international rescue like the one Ireland needed to shore up its financial system.

The government has asked lenders to increase provisions for bad debt by 54 billion euros ($70 billion) to 166 billion euros. That’s enough to cover losses of about 50 percent on loans to property developers and construction firms, according to the Bank of Spain. There wouldn’t be anything left for defaults on more than 1.4 trillion euros of home loans and corporate debt.

The government, which came to power in December, announced yesterday that it will take control of Bankia with a 45 percent stake by converting 4.5 billion euros of preferred shares into ordinary stock.

Spain’s home-loan defaults were 2.7 percent in December, according to the Spanish mortgage association.

Taking those into account, banks would need to increase provisions by as much as five times what the government says, or 270 billion euros, according to estimates by the Centre for European Policy Studies, a Brussels-based research group. Plugging that hole would increase Spain’s public debt by almost 50 percent or force it to seek a bailout, following in the footsteps of Ireland, Greece and Portugal.

Spain… is mired in a double-dip recession that has driven unemployment above 24 percent and government borrowing costs to the highest level since the country adopted the euro. Investors are concerned that the Mediterranean nation, Europe’s fifth-largest economy with a banking system six times bigger than Ireland’s, may be too big to save.

In both countries, loans to real estate developers proved most toxic. Ireland funded a so-called bad bank to take much of that debt off lenders’ books, forcing writedowns of 58 percent. The government also required banks to raise capital to cover what was left behind, assuming expected losses of 7 percent for residential mortgages, 15 percent on the debt of small companies and 4 percent on that of larger corporations.

Regards,

Bill Bonner
for The Daily Reckoning Australia

From the Archives…

Is the Australian Economy… Booming…or Busting?
2012-05-11 – Greg Canavan

The Art of Value Investing: How to Value a Business, Not a Stock
2012-05-10 – Greg Canavan

When Financial Markets Decouple From Reality
2012-05-09 – Dan Denning

Low Interest Rates Are A Dangerous Addiction!
2012-05-08 – Satyajit Das

The Bear Hunters and the Trigger Event for the Aussie Dollar
2012-04-07 – Dan Denning

Bill Bonner
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.

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