Sweden’s Finance Minister Anders Borg on Tuesday signalled he has abandoned his long-held resistance to using fiscal measures to kick start the European Union’s sluggish economy. … Read More
Detroit is ‘insolvent,’ according to emergency manager
Kevyn Orr was hired by Michigan back in March to meet with leaders in Detroit to try and figure a way to save the once-thriving city from total bankruptcy. On Sunday he released the first report to show his findings over the past month and a half, and his assessment painted a picture of a city in far worse shape than many thought.According to Orr’s report, the one-time headquarters of the automobile industry is one month away from running out of cash yet owes billions.”The City of Detroit continues to incur expenditures in excess of revenues despite cost reductions and proceeds from long-term debt issuances,” Orr wrote. “In other words, Detroit spends more than it takes in – it is clearly insolvent on a cash flow basis.”“Without a significant restructuring of its debt, the city will be unable to break the cycle of damaging cutbacks in essential municipal services and investments,” the study found.Michigan Governor Rick Snyder said in March of Detroit that “There’s probably no city that’s more financially challenged in the entire United States.” He declared a state of fiscal emergency at the time and told Detroit Mayor David Bing that he’d be appointing an emergency manager — Orr — to assist with operations.Initially, the Detroit City Council rejected the governor’s decision.“We feel like we have the tools necessary to do it, that somebody else does not have to come in and do it for us,” Council President Charles Pugh told the Associated Press at the time.Ultimately, Snyder sent Orr to assess the situation, a decision Bing endorsed because, according to him, “we have to learn to make the best out of a bad situation.” Now with the completion of Orr’s first report, the details of that dilemma are being fully revealed.Orr wrote that a number of issues are keeping Detroit from staying afloat much longer, including an ever-growing deficit, loads of liabilities and rampant mismanagement in terms of city services. At the end of fiscal year 2012, Detroit had “negative cash flows of $115.5 million” and things have only worsened. By the end of April the city was holding onto $64 million cash, but was obligated to the tune of roughly $226 million.Orr found additionally that the city has liabilities including pension obligations, bonds and loans totaling $9.4 billion — including $5.7 billion in unfunded retiree benefit obligations — and expects the total deficit to top $380 million by June 30. At that point, the city will have to either defer pension payments and other obligations or pray for a miracle.“If we don’t change and restructure, we are going to run out of cash,” Bill Nowling, a spokesman for Orr, told Bloomberg News. “That shouldn’t come as a shock to anybody.”According to Nowling, all of the city’s revenue couldn’t pay off its debt in 20 years’ time.“This is exactly the situation the city is in, and our creditors need to know that,” Nowling said. “Some do. A lot don’t.”But as the city of Detroit is stuck figuring out who to pay and how exactly they’ll do that, Orr wrote that other issues need to be examined in order to cut down on costs. He noted that recently he signed off on a contract with the Michigan Department of Corrections that will consolidate all Detroit Police Department pre-arraignment jail operations into one centralized jail, and that the regular closings of roughly a dozen fire stations in the city at any given time has saved costs — albeit at a price that could mean the difference between life and death.Elsewhere, Orr said that the city’s safety concerns are only made worse by blight, “one of the city’s most pervasive and pressing problems” he calls both a public safety and a public health issue.“In its 139 square miles, the city includes at least 60,000 parcels of vacant land (constituting approximately 15 percent of all parcels in the city) and approximately 78,000 vacant structures, of which 38,000 are estimated to be in potentially dangerous condition,” Orr wrote.“All city services are less efficient, and under-resourced, because these services must be provided over a large geographic area with low population density,” he continued. Indeed, population has dropped by 60 percent since the 1950s, but meanwhile Orr said the city still provides services to a geographic area larger than Boston, Manhattan and San Francisco combined. “Falling levels of economy activity,” he wrote, “also feed into a smaller ratepayer base to support city services, including water, sewer and electricity.”In a statement he issued with the release of his report, Orr wrote, “No one should underestimate the severity of the financial crisis,” calling his assessment “a sobering wake-up call about the dire financial straits the city of Detroit faces.” … Read More
Austerity belt: Looking for the best size
Officials across Europe have begun talking about the need to soften the measures adopted by the debt – ridden economies as a security for financial help from the troika of international creditors – the International Monetary Fund (IMF), the European Commission (EC) and the European Central Bank (ECB).The latest from French Finance Minister Pierre Moscovici, said that the country was about to finish its austerity, shifting the focus to growth.“We’re witnessing the end of the dogma of austerity” as the only tool to fight the euro debt crisis, Moscovici said on Europe 1 radio. “Austerity on its own impedes growth,” he added.The current trajectory of austerity had “reached its limits” as European Commission chief Jose Manuel Barroso put it.“…in the early phase of the crisis, it was essential to restore the credibility of fiscal policy in Europe… Now, as we have restored the credibility in the short term, that gives us the possibility of having a smoother path of fiscal adjustment in the medium term,” explained Olli Rehn, the EU commissioner for economic and monetary affairs.‘Cut or grow’ dilemmaOfficial say that economic stimulus, not painful cuts, are needed to make the indebted countries grow again.“An economy is recovering only provided stimulus to speed up growth is there,” Martin Schulz, from the European parliament, told Belgian newspaper L’Echo in an interview.A usual deficit reduction mix includes higher taxes and lower spending. The aftermath of such belt tightening keeps knocking the citizens for six. The unemployment rate in the EU reached its all-time high of 12.1% in March 2013, which is making some people across the affected countries take to the streets to express their outrage at the measures.Slovenia, Spain and Portugal are the most recent “hot points.” Protesters flooded Ljubljana, Madrid and Lisbon to voice disappointment with the troika of international lenders, whom the public are increasingly blaming for the economic hardship in their countries.“Troika means austerity and we have been experiencing for more than a year and a half the austerity measures which have destroyed every good prospect of social state, of welfare state. Now we have over a million and a half unemployed,” said Joao Camargo, an anti-troika activist in Portugal.“… it does seem clear that much of Europe has cut too deeply and this has killed growth, so completely there will be no recovery. So, some easing does seem appropriate,” Ben Aris, editor-in-chief at Business New Europe, told Business RT.A reasonable balance between cuts and growth stimulus is what should be a way out, Aris said. “The trouble is that no one knows where this balance lies. We are in uncharted territory now and everyone is feeling their way,” he concluded.Banking union for the Union that’s bankingThe idea to set up a banking union – a joint banking supervisor for the 17–nation eurozone financial system – to stabilize the area’s economy has been a point of heated debate. While experts agree the body is necessary to settle the turmoil, so far there’s little progress on the way to make this idea come to life.“It [setting up a banking union] is a start, a step towards full fiscal as opposed to just monetary union in Europe, as the lack of a fiscal union is at the heart of the problems today,” Aris explained.Mariano Rajoy, Spanish Prime Minister, and Enrico Letta, his Italian counterpart, agreed that the final decision on the banking union should be made as soon as the June European Union summit.A banking union could have also helped to sidestep the Cyprus crisis, where savers lost much of their deposits and paid for the island’s mistakes. Looking to meet the requirements from the troika and fund its financial shortfall, Cyprus authorities introduced a levy ranging between 30 and 40 per cent on depositors’ holdings above 100,000 euros.The Cyprus precedent may frighten people in southern Europe away from bringing in amounts above the insured limit of 100,000 euros to banks. So far there hasn’t been a massive withdrawal from bank accounts across Europe, but one can’t deny the danger of a so-called “deposit exodus.” Weighing on the banks’ credit capacity, this may become a real drag on economic growth.So far the European Central Bank and Germany – the biggest economy in the euro area – are at odds over how to set up a banking supervisor. While ECB executive board member Yves Mersch insists that a centralized authority to unwind failing banks would be needed in addition to the very union, German Finance Minister Wolfgang Schaeuble says the new authority would necessarily require changes to the European Union’s treaties, which will take time.“However, it is a half measure. Still, politically speaking it is about the most the politicians in Europe can hope to get through at the moment,” Ben Aris concluded. … Read More
Inside Story Americas – The consequences of the sequester
http://www.youtube.com/v/IylnHIs1wU4?version=3&f=videos&app=youtube_gdata Source article: Inside Story Americas – The consequences of the sequester
Colbert takes on UMass ‘Poindexter’ who debunked pro-austerity study
Stephen Colbert had a bone to pick on Tuesday with the “left-leaning academi-aholes” at the University of Massachusetts who found a crucial error in the Harvard study fiscal conservatives have cited to justify government austerity policies. “Nerds!” the “Colbert…
Austerity in EU has reached the limit, focusing on growth is the priority
“While I think this policy is fundamentally right, I think it has reached its limits,” Jose Manuel Barroso said during a conference in Brussels adding that choosing between austerity and growth “is completely wrong” and that while austerity is working, there should be more pro-growth measures as well.”This is indispensable, but it has to be complemented by a stronger emphasis on growth and growth measures, even in the shorter term,” he said. “We need to complement this with short-term measures for growth.”He also hinted that some countries could be given longer to get their budget deficit in line with EU rules which limit it to 3% of gross domestic product.Olli Rehn, the European Commissioner for Economic and Monetary Affairs, quoted by Reuters, said that ‘‘in the early phase of the crisis, it was essential to restore the credibility of fiscal policy in Europe… Now, as we have restored the credibility in the short term, that gives us the possibility of having a smoother path of fiscal adjustment in the medium term,” he explained.Wrapping up the meeting of the Group of 20 in Washington last week the monetary authorities of the world’s leading economies agreed that Europe does not need so much austerity and has to find alternative ways to boost economic growth.The meeting did not result in many new decisions. The finance ministers and central bankers along with IMF representatives were concerned with growth more than debt reduction. Russia chaired the summit in Washington and tried to reach an agreement to set fixed targets for reducing debt by the G-20 leaders meeting in St. Petersburg in September. However this idea was rejected by the representatives of the US and Japan.In earlier statements Olli Rehn, said that blindly attempting to reach deficit targets is counter-productive, insisting that countries should rather focus on reforms to liberalise their economies, according to the Financial Times.Austerity alone isn’t enoughMore Europe’an central bankers are starting to agree that they didn’t fully realize that their austerity policies could have nasty side effects, and need to slow the pace of budget cutting and focus on growth and creating jobs.One of the keenest promoters of austerity in Europe, Germany’s Finance Minister Wolfgang Schaeuble said “fiscal and financial sector adjustments remain crucial to regain lost credibility and strengthen confidence.’’‘‘At the current juncture, it is in particular the responsibility of the advanced economies, including Japan and the US, to follow through with ambitious fiscal consolidation over the medium term,” he added. The joint statement issued at the outcome of the meeting said these strategies are to be developed by the time of the St. Petersburg summit due in September, reaffirming the results of the previous G20 meeting in February.Closing the meeting, the IMF lowered its global growth forecasts, with most concerns focused on Europe. Managing Director Christine Lagarde divided the group’s states into three types. In the first group she included developing and emerging economies that are the engine of global growth. In the second she put countries that are gaining momentum in their recoveries, like the United States. Most European states were put in to the third, most troubling group of states, which failed to stimulate their economies and hence slow down the global growth pace. Among them Lagarde named Germany, France, Italy and the UK. The Fitch agency cut its credit rating on the UK on Friday to AA+, saying that weak growth will lead to general government debt rising to 101% of GDP by 2015-2016.EU’s second largest economy, France missed its deficit goal in 2012 with deficit stuck at 4.8% of economic output, EU data showed on Monday. France is now appealing to the European Commission which is to decide on whether to give France more time to bring their deficits down towards the EU limit of 3 percent.Spain also failed to meet the target deficit as the shortfall totaled 10.6% of GDP above the European Commission’s forecast of 10.2%.Meanwhile Japan was given thumbs up at the G20 summit. Finance ministers and central bankers have approved Japan’s aggressive stimulus program, which has so far weakened the yen and boosted exports. According to the Japanese Finance Minister Taro Aso, his colleagues understand that Japan is aiming at beating deflation rather than competitively weakening the yen.”To say that a cheap yen is our goal will grossly miss the point,” Taro Aso told the Center for Strategic and International Studies in Washington. … Read More
GOP has always misled the debt debate
Allow me to quickly try to tie together some current events (zipping up to NYC to give this talk).First, you’ve got the Reinhart/Rogoff (R&R) dustup which is generating lots of ink in the AMs papers—more on that in a moment. Second, indicators once again show that the ongoing expansion in American economy continues to underperform, with weak readings on jobs, retail sales, and inflation.The connective tissue here is contractionary fiscal policy. And while no one or two individuals gets the blame for that, R&R’s work, with its arbitrary threshold (remember, they’re the ones purveying the debt/GDP-above-90%-slows-growth thesis), non-contextualized broad averages across countries, and data errors, is a good example of how economists have misled the debate.Continue Reading… … Read More
