Fiscal Austerity, Borrowing Costs and the Eurozone Economies

Πηγή: SEJ
By IYANATUL ISLAM and MARTINA HENGGE
July 12 2012

The current approach to fiscal austerity measures as a means of resolving the Eurozone sovereign debt crisis is widely regarded as ineffective. Economies, most notably in Southern Europe, undergoing the pain of fiscal austerity measures have not seen a significant reduction in long run borrowing costs (as measured by 10-year interest rates). Attaining the latter is important both for debt sustainability as well as kick-starting growth in the debt-distressed Eurozone economies. What went wrong?

There are many criticisms that one can level against the uncritical embrace of fiscal austerity measures as a response to sovereign debt crises. Here, we explore the widely held – but largely unsubstantiated – view among policy-makers that international capital markets populated by ‘bond vigilantes’ care largely or exclusively about national debts and deficits. Hence, cutting deficits in a resolute fashion in order to reduce public indebtedness is expected to be rewarded by lower borrowing costs because it will restore ‘market confidence’. Such reduced costs in turn are expected to spur investment, growth and creation of jobs. As a former President of the ECB put it, ‘At present, a major problem is the lack of confidence on the part of households, firms, savers and investors who feel that fiscal policies are not sound and sustainable’.[1] The British Prime Minister delineates the perceived linkages between interest rates, debts and deficits quite clearly: ‘If markets don’t believe you are serious about dealing with your debts, your interest rates rocket and your economy shrinks’.[2]

These pronouncements by influential policy-makers (both past and present) overlook the fact that multiple studies show that formal assessments of sovereign credit worthiness by credit rating agencies routinely include growth indicators in addition to measures of debts and deficits.[3] What is perhaps less well known is that growth has a more significant impact on sovereign default risks than debts and deficits.[4] The implication is that that cutting deficits to reduce public debt might be self-defeating given that such actions typically reduce growth raising doubts among ‘bond vigilantes’ about the sustainability of fiscal austerity measures.

We show in Figure 1, based on a sample of observations for Eurozone economies, that there is an expected negative correlation between annual growth rates and long run borrowing costs.Figure 2 exhibits the expected positive correlation between long run interest rates and annual changes in gross debt-to-GDP ratios. On the other hand, our attempt to plot an association between annual declines in structural deficits and long run interest rates yields the seemingly counter-intuitive pattern that fiscal tightening is not associated with lower interest rates – seeFigure 3.

We combine the information in the aforementioned figures into a simple regression estimate. We find that a one percentage point increase in the GDP growth rate is associated with a statistically significant decrease in borrowing costs of 0.75 percentage points. A one percentage point increase in the annual debt-to-GDP ratio, on the other hand, has a comparatively smaller impact on long run interest rates (of the order of 0.26 percentage points). In addition, we could not ascertain any statistically significant impact of changes in fiscal deficits on long run interest rates. It thus follows that the current pursuit of fiscal austerity measures in the case of the Eurozone economies is unlikely to accomplish its key objective of reducing borrowing costs on a sustainable basis. It also supports the contention of those who advocate the need to focus on growth in dealing with the debt-distressed economies of the Eurozone.

Figure 1

Eurozone – GDP growth rates are negatively correlated with 10 year interest rates, 2010-2011



Sources: OECD Key Short-Term Economic Indicators (June 2012) and IMF World Economic Outlook (April 2012).



Figure 2

Eurozone – higher increases in the debt-to-GDP ratio are associated with higher interest rates, 2010-2011

Sources: OECD Key Short-Term Economic Indicators (June 2012) and IMF World Economic Outlook (April 2012).

Figure 3

Eurozone – fiscal tightening is not associated with lower long run interest rates, 2010-2011

Sources: OECD Key Short-Term Economic Indicators (June 2012) and IMF World Economic Outlook (April 2012).



[1] See European Central Bank, Interview with Jean-Claude Tritchet, President of the ECB, and Liberation, July 8, 2010


[2] David Cameron, ‘A Speech on the Economy,’ Thursday, May 17, 2012 available at http://www.number10.gov.uk/news/pm-economy-speech/


[3] See, for example, Alfonso, A., Gomes, P. and Rother, P. (2011) ‘Short and Long-run Determinants of Sovereign Debt Credit Ratings’, International Journal of Finance and Economics, 16(1), 1-15. See also European Parliament (2011) Rating agencies – Role and influence of their sovereign credit risk assessment in the euro area, Monetary Dialogue December 2011.


[4] Cottarelli, C. and Jaramillo, L. (2012) ‘Walking Hand in Hand: Fiscal Policy and Growth in Advanced Economies’ IMF Working Paper 12/137.

About Iyanatul Islam and Martina Hengge

Iyanatul (‘Yan’) Islam, a Cambridge- educated economist, is currently Chief, Country Employment Policy Unit, Employment Policy Department, ILO Geneva. Martina Hengge, a graduate of the University of St Andrews, is currently working on macroeconomic and labour market policies for the Country Employment Policy Unit at the International Labour Office (Geneva).

Obama budget sees $1.3T deficit for 2012

Government Printing Office employees Clark Hopkin, left, and Sam Simm, ready copies of President Barack Obama's fiscal 2013 federal budget books, Thursday, Feb. 9, 2012, at the GPO in Washington.

Πηγή: dailycamera
By Andrew Taylor (AP)

Feb 10 2012

WASHINGTON -- President Barack Obama's new budget predicts a $1.3 trillion deficit for the ongoing fiscal year but that would drop to $575 billion in 2018 if the president gets his wish to raise taxes and if policymakers can live within tight restraints on the Pentagon and other Cabinet agency budgets, the White House said Friday.

After four consecutive years of trillion dollar-plus deficits, next year's budget shortfall would drop to $901 billion under the administration's tax and spending policies.

In his budget submission on Monday, the president will also call for a "Buffett Rule" -- that would guarantee that households making more than $1 million a year pay at least 30 percent of their income in taxes. Billionaire financier Warren Buffett has made headlines proposing the idea, saying that it's unfair for him to pay a lower tax rate than his secretary.

Obama will also call for Congress to enact a tax reform plan that would raise about $1.5 trillion over the coming decade by eliminating numerous tax preferences and assuming revenues from the expiration of Bush-era tax cuts for people in the upper brackets. The president is also going to call for lower corporate tax rates as well as an end to many corporate tax loopholes; details will come later in the month.

The election-year document is sure to get a brushoff from Republicans controlling the House. The White House says that Monday's budget will contain many items from a September submission to a failed congressional deficit "supercommittee," which deadlocked over tax increases and how much to cut popular benefit programs like Medicare.

The Obama budget will also reflect tight "caps" on agency operating budgets forged in last summer's budget and debt limit pact between Obama and House Speaker John Boehner. Those include a $6 billion cut in the budget for core Pentagon operations and cuts to many domestic agencies as well.

But it's commonly assumed that presidential politics will prevent Democrats and Republicans from renewing efforts for a broader budget agreement, though negotiations on Capitol Hill are under way in efforts to renew jobless benefits for the long-term unemployed and a 2 percentage point cut in payroll taxes and prevent a 27 percent cut in Medicare payments to doctors that's the product of an outdated funding formula.

Administration officials briefed reporters and issued a fact sheet after several figures were reported in The Wall St. Journal, which viewed leaked draft budget documents.

White House talking points said the budget will put "the nation on a path to live within our means -- by cutting wasteful spending, asking all Americans to shoulder their fair share and making tough choices on some things we cannot afford, while keeping the investments we need to grow the economy and create jobs."

The president will also propose a six-year, $476 billion highway and surface transportation bill and $360 billion from curbs to federal health care programs like Medicare and Medicaid. There's $278 billion more in savings from non-health benefits programs like farm subsidies and federal civilian worker pensions.

There's also an immediate $350 billion for job-creating measures, about $100 billion less than presented in Obama's September jobs plan because the administration is giving up on increasing the 2 percentage point payroll tax cut to 3.1 percent and giving it to businesses.

Libya sees $10bn budget deficit

Πηγή: Business Report
Feb 2 2012

Libya's government will post a budget deficit of $10 billion this year as it struggles to pay public workers' salaries and meet energy costs, the head of the country's National Transitional Council (NTC) said in remarks published on Thursday.

Mustafa Abdel Jalil told French daily newspaper Le Figaro the country had still only recovered a fraction of the $100 billion in assets frozen overseas during the country's bitter civil war.

“The production of oil has brought in $4 billion in the last five months, while the salaries of civil servants are $22 billion a year and spending on electricity and fuel $14 billion,” Abdel Jalil said. “The budget being prepared should be in deficit of $10 billion.”

Restoring oil and gas production in the OPEC member state is key to rebuilding the country and reviving the economy after an eight-month civil war, the International Monetary Fund said on Monday, warning the government's finances remained “precarious.”

The country's central bank governor, Saddeq Omar Elkaber, said on January 19 the government 2012's budget would register a 7 billion dinar ($5.6 billion) deficit and that the lifting of U.N. sanctions on the central bank's assets had unfrozen 95 percent of its $100 billion in assets.

“Only $6 billion has been repatriated,” Abdel Jalil said. “We're still working to recover the rest.”

Abdel Jalil said that local councils were putting together organisational structures and once they were in place money would be injected to pay civil servants. He said that process should be completed by February 17.

The NTC, the body which won NATO backing to oust Muammar Gaddafi last year, is now struggling to restore services and impose order on myriad armed groups.

Militias have carved up the capital Tripoli and the rest of the country into competing fiefdoms, each holding out for the share of power they say they are owed.

Abdel Jalil said that it would be easier to amalgamate militias into the police and national army once more revenues entered the state coffers.

“Within two months we think we will have incorporated 60-70 percent of the revolutionaries,” he said. - Reuters

U.S. deficit to top $1 trillion, smallest since ’09

Πηγή: Washington Post
By Lori Montgomery

Jan 31 2012

The federal budget deficit will top $1 trillion for a fourth straight year, congressional budget analysts said Tuesday, but is likely to be the smallest since the Great Recession began taking a toll on the budget in 2009.

The nonpartisan Congressional Budget Office projected that the gap between government spending and tax collections would continue to fall, dropping sharply in 2013 and through the decade if policymakers follow through with major changes in both tax policy and government spending now on the books.

The $1.1 trillion deficit is the smallest deficit figure — both in nominal terms and as a percentage of the economy — since the Great Recession.

The CBO said that allowing the George W. Bush tax cuts to expire on schedule in January and making deep cuts to the Pentagon and other agency budgets would shrink future deficits and begin to tame the national debt.

Still, the nation would pay an economic price for such austerity measures, the CBO said. Raising taxes and cutting government spending would slow economic growth and increase unemployment. The CBO projected that the jobless rate would hit 8.9 percent by the end of this year and rise to 9.2 percent by the end of 2013.

CBO director Douglas Elmendorf said the changes would make “a very large difference” in what the government takes in and what it spends in the next fiscal year, which would amount to nearly $400 billion in 2013 alone. “So the amount of higher revenue and lower spending that would occur under current law is really quite sharp,” Elmendorf said. “We think that will be pushing down the economy as other factors are starting to push the economy up.”

If policymakers instead choose to short-circuit those changes, the nation’s financial health could suffer, the CBO said. Extending the Bush tax cuts would reduce revenues by $5.4 trillion over the next decade. Extending other temporary tax policies, such as the tax break for corporate research and development, would add another $1 trillion to deficits, as would a decision to forego the agency spending cuts agreed to during the battle over the debt-limit last summer.

All told, unless policymakers are willing to ask voters to make significant sacrifices, they risk adding another $11 trillion to the $15.2 trillion national debt through 2022, according to CBO figures.

The Congressional Budget Office takes stock of the federal budget at least three times each year: in January, upon receipt of the president’s budget and again in August. The agency’s projection for the 2012 deficit has increased slightly since August, primarily because of corporate tax receipts and the extension of the Social Security payroll tax holiday through the end of this month.

Lawmakers in both parties want to extend the tax break, which reduces the payroll tax rate from 6.2 percent to 4.2 percent, through the rest of this year. If Congress cannot agree on spending cuts or tax increases to replace the lost revenue, the new extension would add another $75 billion to the 2012 deficit, the CBO said.

Even then, the 2012 budget gap would mark an improvement over the past three years, when the deficit topped out at $1.4 trillion. The budget gap has fallen steadily as a share of the slowly growing economy — dropping from 10 percent in 2009 to a projected 7 percent this year — as individual tax collections have begun to recover and spending on the social safety net has shrunk.

The accumulation of large deficits has required the nation to borrow heavily, and the portion of the debt held by outside investors has doubled since 2007. The CBO projects that it will rise to more than 72 percent of the economy by the end of this year — the highest level since World War II — and then begin to drift downward if Congress and the next president let the Bush tax cuts expire and maintain other austerity policies now scheduled to take effect.

Without those changes, however, the national debt would continue to soar, the CBO said, with the portion held by outside investors rising to 94 percent of the economy by 2022.

“How much or how quickly the deficit declines will depend in part on how well the economy does over the next few years,” the CBO report said. “Probably more critical, though, will be the fiscal policy choices made by lawmakers as they face the substantial changes to tax and spending policies that are slated to take effect within the next year.”

In a statement after the report was released, Senate Budget Committee Chairman Kent Conrad (D-N.D.) called on lawmakers to work together to support the economic recovery. “We will not solve this problem unless both sides, Democrats and Republicans, are willing to move off their fixed positions and find common ground,” he said. “Republicans must be willing to put revenue on the table and accept a tax code where everyone, including the wealthiest, pays their fair share.”

House Budget Committee chairman Paul Ryan (R-Wis.) echoed Conrad and said that he is committed to “building a bipartisan coalition for a principled reform agenda.”

“The CBO’s latest alarm bell couldn’t be more ominous,” Ryan said in a statement. “For years, politicians from both political parties have failed to be honest with the American people about the size and scope of the debt threat. The CBO’s report today confirms that it is past time for serious leaders to put aside politics and start forging solutions.”

"Surprising" Rally for Gold despite "Vulnerability" on Futures Market, "Greece is Bankrupt"

Πηγή: Goldseek
By Ben Traynor, BullionVault

Oct 3 2011

U.S. DOLLAR gold bullion prices began the week strongly, climbing to $1663 per ounce Monday morning London time – a 2.4% gain on Friday's close – while stocks and commodities fell and government bonds rose following news that Greece's second bailout agreed less than three months ago is unlikely to be enough.

Silver bullion prices also rose, climbing to $31.43 per ounce – 4.9% above where they ended last week.

"Surprisingly gold and silver has been rallying in a very thin market," said one Hong Kong bullion dealer this morning.

"If there is no more fund liquidation in the beginning of a new quarter, and given that doomsday is just a few weeks from us, is the safe haven property of precious metals back in fashion again?"

The net long position of bullish minus bearish contracts held by noncommercial – so-called speculative – gold futures and options traders on New York's Comex exchange fell by more than 20% in the week ended September 27, according to data published Friday by the US Commodity Futures Trading Commission.

Speculative net longs fell to 158,754 100-ounce contracts – the lowest level since May 2009, and equivalent to 494 tonnes of gold bullion – as the number of short positions rose while long positions decreased.

"The continuation of the decline in speculative longs indicates the increased caution with which participants are approaching the gold market," says Marc Ground, commodities strategist at Standard Bank.

"Taken together with the increase in speculative shorts – which are currently at relatively high levels – gold appears to have returned to the vulnerability of several weeks ago."

As a percentage of all open interest, speculative net longs fell to 19.2% – the lowest level since the week ended 18 November 2008, when the figure was 12.3%. The price of gold bullion at the PM London Fix that day was $738 per ounce – it has not been lower since.

The gross tonnage of gold held to back shares in the SPDR Gold Trust (ticker GLD) – the world's largest gold ETF – also fell last week, following a sharp rise that started towards the end of August.

The GLD held just under 1232 tonnes of gold on Friday – down from 1252 tonnes a week before.

"The continued mix of default fears and economic slowdown are likely to trigger further pockets of cash generating long liquidation," warns a note from Swiss gold bullion refiner MKS.

Despite the outflows, Friday's GLD holdings were less than one tonne below the amount held on 6 September, the day the gold price hit its all-time intraday high of $1920 per ounce.

"To be clear, physical demand right now is not just decent, it is exceptionally strong," noted UBS precious metals strategist Edel Tully last week.

The CFTC data also show a sharp drop in speculative net long silver positions – together with a corresponding fall in net short positions held by commercial traders (including miners, refiners and bullion banks) who take the other side of that trade.

In Europe meantime, the Greek government announced Sunday that it expects to miss deficit targets agreed earlier this year with its 'troika' of creditors – the European Central Bank, European Union and International Monetary Fund – despite announcing fresh austerity measures.

Greece now expects its deficit is to be 8.5% for 2011 – compared to the 7.6% forecast on which a second bailout worth €109 billion was agreed in July.

"Greece is bankrupt," says Michael Fuchs, deputy parliamentary floor leader for Chancellor Merkel's Christian Democratic Union party.

"Probably there is no other way for us other than to accept at least a 50% forgiveness of its debts."
Private sector banks agreed in July to accept a 21% write-down in the value of their Greek debt holdings.

"I am warning in the most forceful way against any material revision [of July's agreement]," said Deutsche Bank chairman Josef Ackermann on Sunday.

Ackerman is also head of the International Institute of Finance, which agreed the terms under which private creditors would undertake a bond swap.

"If we reopen the voluntary accord of July 21, we will not only lose precious time but quite possibly also private investor support...the impact of such a move will be incalculable."

Over in China meantime – the world's second-largest source of private gold bullion demand – manufacturing growth accelerated in September, according to official data published Saturday.

China's purchasing managers index (manufacturing) rose to 51.2 – up from 50.9 for August (a figure above 50 indicates sector expansion).

Here in Europe, data published today show German manufacturing grew slightly last month, with PMI rising to 50.3 from 50.0 last month.

For the Eurozone as a whole, however, manufacturing activity continued to contract, with the PMI coming in at 48.5 – down from 49.0 in August. Here in the UK, manufacturing PMI rose to 51.1 – up from 49.4 for August.

Ben Traynor Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Obama plans taxes and spending cuts to reduce deficit

President Obama's call for tax increases will face opposition from Republicans in Congress

Πηγή: BBC
Sep. 19 2011


President Barack Obama is to unveil plans to cut the US deficit by $3 trillion (£1.9tn) over the next decade.
A White House official said his proposals include an overhaul of the tax code that would raise $1.5tn.

The official said the president would not agree to cuts in health care for the elderly if there were no provisions for rich Americans to pay more tax.

Republicans in Congress have already said they will not agree to any plans to increase taxes.

Mr Obama's plans include nearly $250bn in cuts on Medicare spending - the health care programme for the elderly.

"He will veto any bill that takes one dime from the Medicare benefits seniors rely on without asking the wealthiest Americans and biggest corporations to pay their fair share," Reuters quoted an Obama administration official as saying.

The president is scheduled to announce his long-term deficit reduction plan at the White House at 10:30 (14:30 GMT) on Monday.Closing loopholes

Over the weekend, officials have been providing journalists with a preview of what the president's plan includes.

On Saturday, officials said Mr Obama wanted a "Buffett Rule" that would see Americans who earn more than $1m pay the same rate of tax as those who earn less.

The proposal refers to the billionaire financier Warren Buffett who has complained that he and his wealthy peers pay relatively less tax than the people who work for them.

Many high-income Americans benefit from tax loopholes that see earnings on investment taxed at lower rates than wages.

The US economy has been growing only slowly while the unemployment rate remains stubbornly high, above 9%. Facing an election next year, Mr Obama has had a battle in Congress over how to reduce the ballooning deficit while the economy remains stagnant.

A Congressional "supercommittee" of six Republicans and six Democrats has been charged with finding $1.5trn in deficit cuts by late November, when automatic cuts come into force.

Ratings agency Standard and Poor's cut the US AAA rating in August after the country went to the brink of a default over an extended battle in Congress over raising the government's debt limit.