All of this noise out of Greece has taken attention away from the fastly approaching U.S. fiscal cliff: the end-of-year deadline that threatens to lop off an estimated 3 to 5 percentage points off of GDP growth in 2013.
Reinhart’s note discusses the timetable regarding the fiscal cliff:
Unfortunately, there is no clear timetable for action. Congress will deal with the situation when it is good and ready to do so. And, the lessons from similar experiences in recent years suggests that such action will occur at the last minute.
But as an economist who’s getting paid to make forecasts and opinions, he shares with us the key dates that he’ll be watching. Here’s his assesment:
[T]here is a strong likelihood that there will be a lame duck session of Congress following the November election. Ideally, legislators will reach agreement on a plan which avoids the 2013 fiscal cliff and, at the same time, addresses the unsustainable longer-term course of US fiscal policy. However, given the elevated degree of gridlock in DC and the likelihood that some degree of gridlock will remain no matter what the election outcome (it is mathematically impossible for either party to achieve a filibuster proof majority in the Senate), this is an awful lot to expect during a post-election session of Congress that may last six weeks or so at most. A more likely scenario might involve a short-term extension of the major budget provisions or delayed action until debt ceiling constraints help to force a compromise agreement in early 2013. Of course, the longer the delay, the greater the likelihood that policy uncertainty will negatively impact the real economy.
- Morgan Stanley Just Slashed Its US GDP Forecast And Warned Things Could Get A Lot Worse (businessinsider.com)
- CBO Warning: Recession Will Follow 2013 ‘Fiscal Cliff’ (theatlanticwire.com)
- Fiscal cliffs, multipliers, and the myth of central bank independence (economist.com)
21 May, 2012, 14:52 Posted by Zarathustra
The events in Europe right now is essentially a slow-motion bank run (or “bank jog”) on various European banks in the periphery. Greece, for instance, have been losing deposits in their banks, while Spanish bank Bankia was rumoured to have massive among of deposits being withdrawn. And of course, in the days of modern banking with internet and other stuff, you don’t even need to see a massive queue outside a bank to know that there’s a bank run.
Disturbingly, what’s happening today in Europe reminds me of something happening more than 80 years ago, when bank failures triggered bank runs virtually in the whole of Europe, later bank holidays in hope to stop bank runs, capital control, and countries going off gold standard. Sure enough, by thinking about the event in 1931 by no means suggest that I think what happened then will surely happen in 2012. It is always, however, good to look at the history and see what we can learn from it.
We all knew that the Great Depression started in 1929. Perhaps lesser known is that one of the more dangerous legs of the slump during the the Great Depression did not start until 1931 when an Austrian Bank Credit Anstalt went bust.
At the time, it was the biggest bank of Austria. Its failure triggered a European banking crisis, with bank runs started first with Austrian banks, then with German banks.
In Liaquat Ahamed’s wonderful book Lords of Finance: The Bankers Who Broke the World, he wrote that while Austria was a small country with the GDP about one tenth of Germany’s, remarkably the failing on its biggest bank sent a massive shockwave to the whole of Europe, an ultimately to the world economy. While the big central bankers were trying to come up with rescue packages, without the experience of modern central banking, they came in too late, with too little money.
During the time of the Great Depression, it was the French which had the biggest gold reserve after the United States. At the time of Credit Anstalt’s failure, the French was apparently faring relatively well among European countries. And not surprisingly, politics was in play in their attempt to save themselves. France, although financially stronger among European great powers, they were not keen at all to save the Germans and Austrians (perhaps still quite keen to punish them for starting World War One). When the United States unilaterally forgo war debts from Europe for a year, which included German’s reparation, France was furious. Liaquat Ahamed quoted that the British Prime Minister at the time Ramsay MacDonald saying that “France has been playing its usual small minded and selfish fame over Hoover proposal…”, while the Bank of England Governor’s Montagu Norman said, according to Ahamed, that “Berlin was being ‘bled to death’ while the French and the Americans were busy arguing” (p. 413). And sure enough, when the German’s central bank Reichsbank asked Banque de France and the French government for help, that didn’t work. The French government offered some loan with conditions, which the Germans thought of that as “political blackmail”.
As the crisis worsened, Danatbank, at the time the second biggest bank in Germany, went bust some two months later after Credit Anstalt failed. On 13 July, it failed to open for business, triggering yet another wave of massive bank runs on every other German banks. With the banking crisis at its worst, a two-day bank holiday was imposed in German to prevent further drain in deposits. Later, banks in virtually the whole of Europe are closed.
Meanwhile, in London, the government is considering measures to reduce budget deficits even as the banking crisis hit Britain, partly because of UK’s banks exposure to Germany and other countries in the continental Europe, and the Bank of England was losing gold reserve, forcing the Bank to raise interest rate when it should not. The military’s salary would be cut in hope to plug the budget gap, but the some sailors in the Royal Navy became (predictably) very angry and essentially went on strike, an event which is now known as the Invergordon Mutiny. Not a particularly huge event, but enough to send a shockwave to the City of London with stock market crashed and a sterling crisis. In about a week after the Mutiny, Britain was forced out of the gold standard.
- European Banks Are Getting Pounded (mb50.wordpress.com)
- As First Greek CDS “Anstalt” Appears, A Question Emerges: Did Banks Not Square Off Margins? (zerohedge.com)
- Chinese Defaulting on Commodity Contracts (ritholtz.com)
- 18 Signs That The Banking Crisis In Europe Has Just Gone From Bad To Worse (raptureimminent.wordpress.com)
Walker sees four main possibilities, ranging from somewhat benign to extremely costly.
We summarize them quickly here.
- Scenario #1: EU sanctions get put into place starting July 1, resulting in 0.6 million of barrels per day coming off the market. In this case, Brent Crude would rise to about $130/barrel, though possibly less, since the embargo might make exemptions for some distressed buyers of Iranian oil, like Italy and Greece.
- Scenario #2: Full EU sanctions are put in place, plus there’s another 10% cut from other customers. In this case, we’d be talking about oil going to $138/barrel.
- Scenario #3: Iranian crude exports are halted entirely, perhaps as a result of an Israeli air strike. Then we’re talking about a loss of 2.5 million barrels per day of supply, and Brent Crude prices up around $205.
- Scenario #4: The complete shutdown of Iranian oil. This would require some kind of military action and wide internal upheaval. In this case, the world would lose 4 million barrels per day, and we’d see crude as high as $270 per barrel.
Read more: BI
- The 10 Countries That Would Get Screwed In An Iranian Oil Shutdown (businessinsider.com)
- What Happens if Iran Does Close the Strait of Hormuz? $440 Oil? (247wallst.com)
- Iran stops oil sales to British, French companies (mb50.wordpress.com)
- SHIPPING CEO: Iran Could Send Oil To $440/Barrel (businessinsider.com)
- Four Scenarios For Engaging Iran At The Strait Of Hormuz (businessinsider.com)
Tehran has fulfilled its threat to retaliate for the EU’s oil embargo, agreed by the bloc on January 26. The sanctions gave the EU members time till July to find new suppliers.
Officials within Iran immediately called to cork the black gold stream to Europe, targeting economies weakened by the ongoing financial crisis. On Wednesday, these calls became reality.
- Iran could ban EU oil exports next week (mb50.wordpress.com)
- Iran ‘definitely’ closing Strait of Hormuz over EU oil embargo (mb50.wordpress.com)
- EU firms renew Iran oil deals to win sanction reprieve (mb50.wordpress.com)
- Sanction Show Signs Of Taking Toll On Iran | Fox News (foxnews.com)
- Iran Gave Syria $1 Billion To Aid Regime Against Sanctions, Documents Reveal | Fox News (foxnews.com)
- U.S. naval carrier group positioned closer to Iran (theextinctionprotocol.wordpress.com)
- Turkey Pledges to Stick with Iranian Oil (ibtimes.com)