Benn Steil

Geo-Graphics

A graphical take on geoeconomic issues, with links to the news and expert commentary.

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Showing posts for "Currencies"

Will Portugal Bring Down the Spanish Banking Sector?

by Benn Steil and Dinah Walker
spain exposure to portugal

In its recent evaluation of the Greek bailout program, the IMF revealed that the euro area leadership sought to delay a Greek sovereign debt restructuring back in 2010 because of contagion fears; that is, Greece’s creditors might get sucked into the bailout vortex. Among eurozone national banking systems, France had the largest exposure. At its peak in the second quarter of 2008, France’s exposure to Greece totaled $86 billion. That exposure has since plummeted, partly because French banks took advantage of the ECB’s Securities Market Programme (SMP) during 2010-11 to fob off Greek bonds, effectively forcing a eurozone mutualization of the debt. SMP was terminated in September 2012. Read more »

The New Geo-Graphics iPad Mini Index Should Calm Talk of Currency Wars

by Benn Steil and Dinah Walker

The “law of one price” holds that identical goods should trade for the same price in an efficient market.  To what extent does it hold internationally?

The Economist magazine’s famous Big Mac Index uses the price of McDonalds’ burgers around the world, expressed in a common currency (U.S. dollars), to estimate the extent to which various currencies are over- or under-valued.  The Big Mac is a global product, identical across borders, which makes it an interesting one for this purpose.  Yet it travels badly – cross-border flows of burgers won’t align their prices internationally. Read more »

Can China’s Bond Market Support a Global RMB?

by Benn Steil and Dinah Walker
RMB

On April 24, the Australian central bank announced that it would raise the proportion of its reserves devoted to Chinese financial assets from 0% to 5%, likely among the highest such allocations among world central banks.  Will other major central banks follow suit? Read more »

Eric Rauchway Battles “The Battle of Bretton Woods”

by Benn Steil and Dinah Walker
Don Quixote, courtesy of the Biblioteca de la Facultad de Derecho y Ciencias del Trabajo Universidad de Sevilla. Don Quixote, courtesy of the Biblioteca de la Facultad de Derecho y Ciencias del Trabajo Universidad de Sevilla.

Benn’s new book The Battle of Bretton Woods has been called “the gold standard on its topic” by the New York Times, “a triumph of economic and diplomatic history” by the Financial Times, and “a superb history” by the Wall Street Journal.  But Eric Rauchway is having none of it.  He’s dinged the book twice now, its only two negative reviews—first for the IMF’s Finance & Development and then, in an extended dance remix version, for the TLS. Read more »

Why Easy Money Is Not Enough: U.S. vs. the Eurozone

by Benn Steil and Dinah Walker
unemployment dispersion

European Central Bank president Mario Draghi has promised to do “whatever it takes to preserve the euro,” and the bank’s Outright Monetary Transactions initiative last September, aimed at pulling down crisis-country bond rates, no doubt calmed market fears of a eurozone breakup. But whereas eurozone sovereign bond spreads have narrowed, the gap in real economic performance – particularly unemployment – between the best and worst performers, as shown in today’s Geo-Graphic, has continued to grow precipitously. Compare this to the United States, which has a fiscal and banking union as well as a monetary one. There, jumps in unemployment rate dispersion across states caused by financial and other shocks are reversed in relatively short order. Read more »

Dr. Strangelove or: How China Learned to Stop Worrying and Love the Dollar

by Benn Steil and Dinah Walker
currency wars

China has since 1994 operated some form of currency peg, harder or softer, between its yuan and the U.S. dollar. While China’s state-run Xinhua news agency has in recent years railed against U.S. management of the dollar, and has called for “a new, stable, and secured global reserve currency,” this week’s Geo-Graphic illustrates why China has little incentive to press for such a thing. Read more »

Greece Hurtles Toward Its Fiscal Cliff

by Benn Steil and Dinah Walker
image

The United States marches solemnly towards its fiscal cliff, awaiting only the command from the Goddess of Reason to halt. Unfortunately for Greece, that country plugged its ears back in March.

Like the United States, Greece made prior commitments on spending and taxation in order to bind itself to the mission of deficit reduction. Unlike the United States, Greece left itself little means to unbind itself. As shown in the graphic above, its massive debt restructuring in March only reduced its debt-to-GDP ratio from 170% to 150%, but in the process made further significant restructuring much more difficult. Read more »

China’s “Helping Hand” Won’t Help Germany

by Jon Hill

Chinese Premier Wen Jiabao recently hinted teasingly that China might buy more risky-country European debt; a “helping hand,” he called it.  Yet even if China follows through, it is unlikely to increase its intended purchases of European debt but rather just change the composition.  China’s euro purchases have increased dramatically over the past two years (we estimate these to be ¾ of reserves purchased in excess of the change in China’s U.S. asset holdings).  Most of this can be presumed to have been invested in German bunds, Europe’s closest thing to U.S. Treasurys.  Chinese euro purchases over the coming twelve months equivalent to those of the previous twelve months could cover the entire 2012 net financing needs of Portugal, Ireland, Italy, Greece, and Spain (PIIGS), as the figure above shows.  Every euro China invests in new PIIGS debt, however, can be expected to come at the expense of bunds.  Such a diversion would push up German interest rates—precisely what Germany wants to avoid by resisting eurobond issuance—without giving Germany any greater say over eurozone fiscal policies.  Chancellor Merkel therefore gains little, if anything, in making political concessions to secure Wen’s “helping hand.”

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Why You Need American Dollars to Mint Australian Ones

by Jon Hill

All countries with central banks exercise monetary sovereignty, right?  Nobel economist Paul Krugman certainly thinks so.  “Wow,” he wrote, after reading Benn Steil and Manuel Hinds say otherwise in the Financial Times on May 24, “Have these guys ever talked to anyone in Sweden, which doesn’t need euros to create more kronor?” Fortunately, we have the data, which is better than talk.  Since Mr. Krugman throws Australia into the mix, we will too.  As the figures above illustrate, when the Swedish and Australian central banks expanded credit dramatically during the recent financial crisis their net foreign assets plummeted.  And this is not merely a crisis effect, as the three decades of Australian data show. So it turns out that you do indeed need euros and (American) dollars to create kronor and Australian dollars.  A country that plows on creating credit without them eventually becomes a ward of the IMF.

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Why China Should Revalue

by

China will hit a “growth wall” within the next three years, according to NYU economist Nouriel Roubini. The country’s reliance on fueling GDP growth through exports is unsustainable. He argues that China needs to revalue its currency so as to allow a transition from export-led to domestic demand-led growth. “The real income of households is going to increase, and they’re going to consume more. You export less and you consume more.” Is he right? Though there are more ways than one to skin this cat – domestic reforms that would facilitate faster rising Chinese wages, as advocated by Stanford economist Ronald McKinnon, are one way to fuel greater household spending – the data do indicate that Roubini is correct. As this week’s Geo-Graphic shows, when the renminbi appreciated significantly between 2005 and 2008 Chinese export growth slowed and household spending growth rose. This trend reversed after the pace of appreciation subsequently fell dramatically. This suggests that the Chinese government’s most recent five year development plan, which states that the government “must persist in the strategy of expanding domestic demand and maintaining steady and relatively fast development,” should include currency revaluation as a component policy element. Read more »