IMF Board Attacks Euro Crisis Management

Call to Speed Up Creation of Banking Union

By Markus Dettmer and Christian Reiermann

The EU's bailout of Cyprus has elicited unusually frank and vehement criticism from the finance experts grouped in the IMF's Executive Board. Their damning indictment at an IMF meeting in May reflects global skepticism, especially in emerging economies, about the euro zone's crisis management. 

Paulo Nogueira Batista, 58, is a fan of classical music, a connoisseur of German literature and an advocate of straight talking. As executive director for his native Brazil and 10 smaller countries, he is a member of the Executve Board, the highest-ranking operational decision-making body of the International Monetary Fund (IMF).

His counterparts from the United States and Europe have often witnessed the combative personality of this economist with wavy, salt-and-pepper hair, who attended a high school in Bonn for two years in his youth. Batista is one of the most persistent critics of Western dominance in the IMF.

He often derides the Washington-based organization, headed by French politician Christine Lagarde, as a "North Atlantic monetary fund," because, as he argues, Americans and Europeans are primarily interested in defending their interests and preventing emerging economies like Brazil from exerting their rightful influence in the fund. He resents the Europeans for increasingly availing themselves of the fund's assets to combat their euro crisis, even though they have enough money of their own. "The euro countries abuse their power within the IMF," Batista is fond of saying.

In mid-May, the Brazilian had yet another opportunity to sharply criticize the Europeans' behavior. The bailout package for Cyprus was up for a vote in the IMF Executive Board, a package that includes €1 billion ($1.3 billion) in IMF funds. As it turned out, there were others who shared the Brazilian's critical position.

As evidenced by written position statements and the speaking notes of participants, the event turned into a critical review of Europe's bailout policy. The IMF found itself in the dock along with the European Commission and the European Central Bank (ECB), the two other members of the so-called troika, as well as the countries of the euro zone.

Anti-Primark posing helps nobody

Blaming Western shoppers for the tragic collapse of the Rana Plaza building will make life worse for Bangladeshis

by Rania Hafez 

The collapse of the Rana Plaza building in Dhaka, Bangladesh on 24 April was a terrible tragedy. Over 1,100 workers lost their lives that day – and most were making clothes for Western retailers. But, here’s the thing: despite buying clothes here in the West, I am not responsible for what happened to the Rana Plaza building.

It may sound like a strange statement, but it’s one that has to be made. Like countless others, I shop at Primark, one of the retailers which used labourers housed at the Rana Plaza. And ever since the tragic incident in Bangladesh, I have been made to feel guilty for doing so. In a cringing act of opportunism, assorted NGOs and campaign groups,  carpet-baggers of self-righteousness one and all, are using the terrible incident in Dhaka to re-assert their moral superiority and condemn us plebeian shoppers, not only as contemptible for our cheap tastes, but also as criminal for buying affordable clothes. Ordinary British consumers have been branded culpable for the death of the garment workers in Bangladesh. It is as if we have colluded in the very destruction of the Rana Plaza. The act of buying a Primark t-shirt is enough to turn us into an accessory to murder.

Yet the tragedy in Dhaka was not caused by the British predilection for cheap clothing; the garment factories involved in this incident were not sweat shops; and the workers, although poorly paid in comparison to workers in the UK, received reasonable wages relative with Bangladeshi standards. In fact, the building itself was a large complex of shops and apartments - it even housed a bank. By many accounts, it was a combination of shoddy workmanship, the flouting of building regulations and sheer corruption that led to the building’s collapse. British shoppers were not to blame.

Why Suppressing Feedback Leads To Financial Crashes

If you eliminate feedback from the markets, you get asset bubbles and huge deficits

Central-planning manipulation "works" by closing all the safety valves of market feedback, creating a dangerous but politically appealing illusion of stability and "growth."

by Charles Hugh-Smith

If we see the economy as a system, we understand why removing or suppressing feedback inevitably leads to financial crashes. The essential feature of stable, robust systems (for example, healthy ecosystems) is their wealth of feedback loops and the low-intensity background volatility that complex feedback generates.

The essential feature of unstable, crash-prone systems is monoculture, an artificial structure imposed by a central authority that eliminates or suppresses feedback in service of a simplistic goal--for example, increasing the yield on a single crop, or pushing everyone with cash into risk assets.

Resistance seems futile, but the very act of suppressing feedback dooms the system to collapse.

Removing or suppressing feedback seems to work wonders because the systemic risks generated by this suppression are pushed out of sight. The euro is an excellent example of this dynamic.

The system of national currencies is in essence a gigantic feedback mechanism, as the relative value of a nation's currency reflects its cost structure, trade deficits or surpluses, fiscal deficits, interest rates, central bank policies and a host of other inputs.

A currency that is allowed to fluctuate acts as a "safety valve" feedback when an economy become imbalanced. If the costs of production in one nation are relatively high, its exports will decline and its imports will rise. This leads to large trade deficits, which (except in the case of the reserve currency, the U.S. dollar) lead to lower currency valuations, which feeds back into imports and exports: imports become relatively more expensive as the currency loses buying power internationally, and exports rise as the nations' goods and services become relatively less expensive to other nations.

The net result of this currency feedback loop is to lower imports and increase exports, bringing the trade deficit back into relative balance.

The euro effectively removed this complex feedback from all the economies that accepted the euro. This is the root cause of the European debt crisis: credit was allowed to reach insane levels of fragility and excess because the feedback that was once provided by national currencies and central bank/fiscal policies was removed from the system.

The Wounded Heart

Bill Gross To Ben Bernanke: "Your Policies Are Now Part Of The Problem Rather Than The Solution"

by Bill Gross

Joseph Schumpeter, the originator of the phrase “creative destruction,” authored a less well-known corollary at some point in the 1930s. “Profit,” he wrote, “is temporary by nature: It will vanish in the subsequent process of competition and adaptation.” And so it has, certainly at the micro level for which his remark was obviously intended. Once proud, seemingly indestructible capitalistic giants have seen their profits fall short of “everlasting” and exhibited a far more ephemeral character. Kodak, Sears, Barnes & Noble, AOL and countless others have been “competed” to near oblivion by advancing technology, more focused management, or evolving business models that had better ideas more “adaptable” to a new age.

Yet capitalism at a macro level must inherently be different than the micro individual businesses which comprise it. Profits in total cannot be temporary or competed away if capitalism as we know it is to survive. Granted, the profit share of annual GDP can increase or decrease over time in its ongoing battle with labor and government for market share. But capitalism without profits is like a beating heart without blood. Not only is it profit’s role to stimulate and rationally distribute new investment (blood) to the economic body, but the profit heart in turn must be fed in order to survive.

And just as profits are critical to the longevity of our capitalistic real economy so too is return or “carry” critical to our financial markets. Without the assumption of “carry,” or return over and above the fixed, if mercurial, yield on an economy’s policy rate (fed funds), then investors would be unwilling to risk financial capital and a capitalistic economy would die for lack of oxygen. The carry or return I speak to is most commonly assumed to be a credit or an equity risk “premium” involving some potential amount of gain or loss to an investor’s principal. Corporate and high yield bonds, stocks, private equity and emerging market investments are financial assets that immediately come to mind. If the “carry” or potential return on these asset classes were no more than the 25 basis points offered by today’s fed funds rate, then who would take the chance? Additionally, however, “carry” on an investor’s bond portfolio can be earned by extending duration and holding longer maturities. It can be collected by selling volatility via an asset’s optionality, or it can be earned by sacrificing liquidity and earning what is known as a liquidity premium. There are numerous ways then to earn “carry,” the combination of which for an entire market of investable assets constitutes a good portion of its “beta” or return relative to the “risk free” rate, all of which may be at risk due to artificial pricing.

EU bans claim that water can prevent dehydration

A New High for Brussels bureaucrats 

By Victoria Ward and Nick Collins

EU officials concluded that, following a three-year investigation, there was no evidence to prove the previously undisputed fact.

Producers of bottled water are now forbidden by law from making the claim and will face a two-year jail sentence if they defy the edict, which comes into force in the UK next month.

Last night, critics claimed the EU was at odds with both science and common sense. Conservative MEP Roger Helmer said: “This is stupidity writ large.

“The euro is burning, the EU is falling apart and yet here they are: highly-paid, highly-pensioned officials worrying about the obvious qualities of water and trying to deny us the right to say what is patently true.

“If ever there were an episode which demonstrates the folly of the great European project then this is it.”

NHS health guidelines state clearly that drinking water helps avoid dehydration, and that Britons should drink at least 1.2 litres per day.

The Department for Health disputed the wisdom of the new law. A spokesman said: “Of course water hydrates. While we support the EU in preventing false claims about products, we need to exercise common sense as far as possible."

German professors Dr Andreas Hahn and Dr Moritz Hagenmeyer, who advise food manufacturers on how to advertise their products, asked the European Commission if the claim could be made on labels.

They compiled what they assumed was an uncontroversial statement in order to test new laws which allow products to claim they can reduce the risk of disease, subject to EU approval.

There’s nothing puzzling about Britain’s stagnation Part A

Economists are perplexed to find that today, in a first in any postwar recession, productivity is not recovering

British economists are tearing their hair out over the so-called ‘productivity puzzle’ - the fact that, for the first time in any postwar recession, productivity in Britain has not recovered reasonably quickly after the initial downturn. But it isn’t a puzzle at all, and in truth points to deep structural problems in the British economy, argues Phil Mullan in this important new essay 

by Phil Mullan

The productivity puzzle

Productivity growth is the best guide to a country’s future prosperity. As a measure of economic output relative to employed labour time, productivity gives an indication of how much wealth can be created for society to live on. Productivity’s capacity to grow, therefore, underpins durably improving living standards. In Britain especially, though not uniquely within Europe, productivity growth since the financial crisis of 2008 has been extremely weak – in fact, in Britain’s case, it has remained a couple of per cent below its pre-recession peak.

This has caught many economists by surprise, prompting a significant amount of debate over why this has happened and how long it might endure. While the initial fall of productivity during the recession was in line with everyone’s expectations, there hasn’t been a subsequent recovery in productivity. Instead, productivity has remained low and pretty static. This has become known as the British productivity puzzle (1).

It is perceived as a ‘puzzle’ because normally after a recession, productivity recovers reasonably quickly. Economists traditionally attribute recovery to ‘cyclical’ reasons. Another way of viewing the ‘cyclical’ behaviour of productivity is that it is the statistical expression of two real-economy measures – output and employment. These two tend to move at different speeds during the different stages of the business cycle. Output in a recession usually declines much faster than businesses reduce their headcount, and the measure of productivity therefore falls: less output relative to workers.

Then, when the recession ends and output begins to grow again, the reverse effect is supposed to kick in: the output recovery makes better use of under-used employees before employment picks up again, creating a cyclical boost to productivity: more output relative to workers. This effect is reinforced as output often expands more quickly than employers recruit.

An important point about such ‘cyclical’ shifts is that they do not reflect the impact of the long-term driver of productivity growth: namely, productive capital investment. It is such investment that generates and spreads the innovation and the advances in technology and techniques that make people at work more productive. In contrast to ‘cyclical’ changes, we can call this type of investment ‘structural’ in its impact on productivity.

The big problem with the productivity puzzle discussion is that it assumes that what we are experiencing is primarily some form of business cycle (even if some highlight more than others its unusual and distinct origins in the West’s financial crash from 2007). But in fact, we should be looking deeper into our economic troubles rather than presuming that they are cyclical. Britain’s economic problems – and those of the rest of the Western world – are structural, and this accounts for the poor state of British productivity we see today. A long period of underinvestment in innovation, technology, capital equipment and infrastructure manifest themselves in low productivity. There is no ‘puzzle’ about the absence of a productivity recovery, because there is not a high productivity level to which the economy can recover. Structural British productivity is low. The only ‘puzzle’ is why productivity seemed to be so strong in the pre-2008 period.

Taliban seen waltzing in Tehran

Omar’s blue-eyed boys surface above the radar

By M K Bhadrakumar

The equation between Tehran and the Taliban has always been a matter of speculation. There has been  this notion that the Taliban subscribe to the Wahhabi faith and are virulently anti-Shi’ite and, therefore, they will be on hostile terms till eternity with Iran. But this was never really the case. 

At any rate, the Taliban comprise many factions and it all depends on who one is referring to. As for Iranian intelligence, they’d sup with the devil if need be in the national security interests. 

Conceivably, below-the-radar contacts have been kept up by the Iranians with the Taliban through the past decade. Neither side publicized it, though. Therefore, what happened last week isn’t  earthshaking  – that Tehran has hosted a Taliban delegation. But the stunning part is that the Iranian side publicized it first, on Saturday (here).   

The Taliban confirmed the information earlier today. Presumably, Mullah Omar decided to come clean. It now appears that many a Taliban delegation would have visited Iran from time to time. It also transpires that  Pakistani intelligence was in the loop all along.  

What is of interest is that Iran hosted the Taliban representatives based in Qatar. They are Omar’s blue-eyed boys. This does raise some serious issues. 

After having enjoyed such lavish Qatari hospitality — according to Rod Norland of New York Times (here)  –  it is highly unlikely that the Taliban kept the Emir in Doha in the dark and simply sneaked out to catch a flight to Tehran. 

No, Sir, it doesn’t need much ingenuity to comprehend that the Qataris okayed the trip of the 4 key Taliban reps.Now comes the most intriguing part: If the Qatari Emir knew, would he have kept the matter hidden from the Big Boss in Washington? Impossible, inconceivable, implausible, improbable, incogitable, incredible. You may choose the appropriate word.

Risk and reward

Why the Fed Can't Stop Fueling The Shadow Bank Kiting Machine

by Bill Frezza

Fractional reserve banking is unlike most other businesses. It's not just because its product is money. It's because banks can manufacture their product out of thin air. Traditional commercial banks essentially create money through a well understood and time honored pyramiding of loans. Depositors who understand that their deposits are thereby placed at risk choose their banks accordingly.

Under the bygone rules of free market capitalism, only one thing kept banks from creating an infinite amount of money, and that was fear of failure. Failure occurs when depositors come to believe that their bank has lent out too much manufactured money to too many dodgy borrowers and may not be able to cover depositors’ withdrawals. When this happens, depositors rush to reclaim their money while there is still some left, leading to the bank’s collapse.

Under free market capitalism, banks compete along a spectrum of risk and reward.Conservative banks offer a higher degree of safety by maintaining larger reserves, thereby manufacturing and lending out less money. Through word and deed they let depositors know that they lend to only the most creditworthy borrowers, who generally must post valuable collateral. These banks remain profitable because they successfully attract prudent depositors willing to accept lower rates of interest.

Banks of a more speculative bent offer a lower degree of safety, maintaining smaller reserves to create and lend out more money. Seeking higher returns, they often lend to less creditworthy borrowers who may put up poor quality collateral or none at all. These banks attract risk-taking depositors looking for a higher rate of interest. They can be very profitable during periods of economic expansion but often fall into distress during economic downturns.

Periodic bank failures remind depositors of the connection between risk and reward. When caveat emptor rules, smart depositors who pay attention make money and dumb depositors who don't lose theirs.

Because the latter outcome is intolerable in a democracy, we have government-provided deposit insurance and other taxpayer-financed backstops that shield most depositors from the risk of loss. In theory banks pay premiums to fund this insurance. In practice these premiums are not risk-based. Banks are not penalized for making riskier loans, in turn often leaving the premiums too low to finance payouts. This creates a huge moral hazard, as it frees depositors to seek the highest return without regard for safety.

Worse, it removes conservative banks’ competitive advantage. Under a government-guaranteed deposit insurance regime, conservative bankers who want to stay in business must take on more risk in order to pay the higher interest rates necessary to attract depositors. This often sets off a race to the bottom, which results in periodic banking crises.

After each of these crises, politicians promise taxpayers that it will never happen again. And each time it does, the government creates a new set of labyrinthine regulations that attempt to mimic the business judgment of conservative bankers. Minimum reserve requirements are established, which normally become the maximum as there is little advantage in exceeding them. And both depositors and the bankers themselves become complacent about the banks’ investments because it is so easy to privatize gains and socialize losses.

And Just In Case Abenomics Fails...

Japan Mulls a Preemptive Strike Capability

By J. Michael Cole

Finding itself in an increasingly complex and hostile security environment, Japan has taken the first steps towards developing a pre-emptive first-strike capability. This is a controversial move in a region that remains wary of a potential return to Japanese militarism.

Just a few years ago, the idea that the Japan Self-Defense Forces (JSDF) would be given the ability to conduct operations that go beyond “self defense” would have sounded ludicrous, not to mention that offensive capabilities would have contravened a longstanding interpretation of Japan’s pacifist constitution.

But North Korea’s continuing belligerence and pursuit of nuclear weapons and ballistic missiles, as well as China’s growing assertiveness and sovereignty claims, both appear to be changing Tokyo’s calculations. Another factor that is now making such ruminations possible is the U.S. “pivot” to Asia, which – though more in the concept stage than an actual policy – has manifested itself more tangibly through Washington’swillingness to reassess the role of JSDF in regional security. The budgetary constraints with which the U.S. military must now conjugate have made burden-sharing all but inevitable. One outcome is Washington is accepting a more muscular defense posture for Japan.

Just a few months ago in the wake of North Korea’s third nuclear test, Japan’s defense chief, Itsunori Onodera, said in an interview with Reuters that his country had “the right to develop the ability to make a pre-emptive strike against an imminent attack”, though he added that it had no plans to do so for the time being. Debate on such matters is not new, and usually occurs following a missile or nuclear test by the DPRK. But under Japanese Prime Minister Shinzo Abe, the government has shown itself much more willing to stretch interpretations of the constitution, if not to revise it altogether.

Less than three months after Onodera’s interview, reports emerged that Tokyo was working on a new defense policy framework that, at its core, made provisions for the development of a first-strike capability. Liberal Democratic Party (LDP) legislator and head of the LDP’s National Defense Division, Yasuhide Nakayama, made the recommendations and said that Pyongyang’s nuclear program and the Chinese intrusions in the disputed East China Sea waters had created an atmosphere where people in Japan felt “extreme anxiety about national security.”

Erdogan risks the 'must go' path

Erdogan may be playing with fire

By Pepe Escobar 
Is this the Turkish Spring? No, at least not yet. Is Turkish Prime Minister Recep Tayyip Erdogan the new Mubarak? No, at least not yet. 
History keeps warning us it takes just a spark to light a political bonfire. The recent spark in Istanbul was provided by a small group of very young environmentalists organizing a peaceful sit-in, Occupy-style, in Taksim Square to protest the planned destruction of one of the city center's few remaining public green spaces, Gezi park. 
Gezi park's destruction follows a globally tested neoliberalism racket; it will be replaced by a simulacrum - in this case a replica of the Ottoman Artillery Barracks - housing, what else, yet another shopping mall. It's crucial to note that the mayor of Istanbul, also from the ruling Justice and Development Party (AKP), owns a retail chain that will make a killing out of the mall. And the man holding the contract for this "redevelopment" is no less than Erdogan's son-in-law. 
Predictably harsh police repression led to the protesters being joined by top cadres from Turkey's main opposition party, the Republican People's Party (CHP). And sooner rather than later, the Taksim Square green theme morphed into a Tahrir square-style "Down with the dictator". 
By Saturday, Taksim Square was crammed with tens of thousands of people; a multitude had walked across the Bosphorus Bridge from the Asian side of Istanbul, banging pots and pans Argentina 2002 cacerolazo-style, openly trampling the law against pedestrians crossing the bridge. Police duly upgraded the repression to water cannons, pepper spray and tear gas. 
The behavior of a mostly cowed Turkish broadcast media was predictably appalling - perhaps not surprising when 76 journalists are in jail accused of supporting "terror" and other unspecified "crimes". This may also be interpreted as a reflection of US and North Atlantic Treaty Organization hold over a precious ally - as in "OK, smash a few skulls, but don't kill anybody".
Print media at least exhibited some redeeming features. Hurriyet - a newspaper that used to exercise its critical faculties - recovered some of its dignity by printing headlines such as "Erdogan no longer almighty". Zaman - which is part of the network of the moderate Islamist Gulen movement - showed how worried it is with Erdogan and the AKP's overwhelming power, with editorials condemning his "excessive" behavior and supporting the protesters. 

Japan : It's Not A Bet If You Can't Win

Abe and Horuda have wagered the bet of all bets, but the house (the global economy) never loses

By Raul Ilargi

The reactions to the $314 billion, 7.3% plunge in the Nikkei last week were, let's say, for the best part amusing. The army of experts and analysts stood at the ready to name the external factors that made it happen (by the way, that army seems to have grown a hundredfold or so over the past 5 years, or is that just me? So where's the added quality?). Some blamed it on something Bernanke did or did not say, some on the Dow's drop (0.5%?!) the day before, and others on weakish China's manufacturing numbers. Very few addressed Japan's own internal issues. But that's still where Japan's problem lies, and what can and will lead to more of that volatility.

One thing should be clear: The Bank of Japan is not pumping money into the economy, it's pumping credit into the banking system. They are not the same thing. To tackle deflation, PM Abe and BoJ chief need to increase the velocity of money, and quite dramatically too. Those out there who didn't know it already are now also being forced to consider that no central bank in the world controls the velocity of money, even if most will continue to deny it.

Limitless credit for the banking system will not achieve the stated goal of a 2% rise in overall prices. Not unless the feet on the ground start moving, and spending. But the feet on the ground don't actually have any more money than they had before, during the deflation decade(s), so why should they start spending now? Or does anyone believe the Japanese will start borrowing in huge numbers? After all those years of deflation? Deflation scares people into a deep freeze, and it takes a long time to defrost them. Abe would have much more chance of success if he handed out money to the people than he does with his present policy of handing it to banks, but that's sacrilege.

What seems to have gotten lost in translation very rapidly is the appreciation of how big the gamble is that Japan is taking. And even more how desperate it is. Abenomics is a bet on perception, the perception that Abe and Horuda have control over - virtually - all aspects of all possible outcomes. They do not. As a matter of fact, they have pushed themselves, and their people, into a "doomed if you do, damned if you don't" quandary.

The economics of the 'Turkish Spring'

Erdogan's spending spree has left Turks with a horrendous hangover

By Spengler 

Pitched battles between anti-government demonstrators and Turkish police over several days at Istanbul's Taksim Square constitute a national uprising against Recep Tayyip Erdogan's incipient Islamist dictatorship. As of this writing on June 2, tens of thousands of regime opponents are in control of the heart of Istanbul while police have withdrawn. The economic distress of Turkish households is an important factor in the country's political upheaval. 

News media have already dubbed the demonstrations a "Turkish Spring". That is a turnabout, for the "Turkish model" was touted two years ago as the solution to the economic and social problems of the failing police states of Arab nationalism. Erdogan's supposedly moderate Islamism and dynamic economic management supposedly offered a way out for Egypt and other failed economies of the Middle East. 

Erdogan had declared himself a "servant of Sharia" during his 1994 mayoral campaign in Istanbul, but most Western observers chose to take the would-be Turkish dictator at his subsequent word that he would respect the secular character of the Turkish state. 

It was never to be. Erdogan did not preside over an economic miracle - contrary to the credulous estimates of many Western observes - but arranged, rather the usual sort of Third World credit bubble, which has left Turkish consumers to tighten their belts in response to a devastating debt burden. "Economic troubles will dominate the political agenda, and Erdogan's claim to leadership of the Islamic world - let alone his own country - will look far less credible," I warned in this space April 23 (see Turkey's ticking debt time-bomb, Asia Times Online), just before Moody's assigned Turkey an investment-grade rating, perhaps the poorest judgment by the rating agency since it put a "Aaa" stamp on securities backed by subprime mortgages. 

Turkey's problems can't really be compared to the 2011 revolts in Muslim North Africa, to be sure: the country's economy will keep functioning, although far below the expectations of ordinary Turks, and its political system is robust. But the anti-government demonstrations denote a turning point in the fortunes of Turkish Islamism. 

The demonstrators' anger, to be sure, centers on Erdogan's creeping dictatorship: the gradual imposition of Islamic law in a Turkish state founded on secular principles, the jailing of hundreds of regime opponents, and the assimilation of enormous economic power into corrupt monopolies controlled by Erdogan's party. Leaked US diplomatic cables claimed in 2010 that Erdogan amassed a huge personal fortune through bribery during his term and commissions on the sale of Turkish assets to foreign investors. [1] Kemal Kilicdaroglu, leader of the secular opposition party CHP, compared Erdogan to Hitler. 

Average Swede to Repay Mortgage in 140 Years

Sweden Housing Crash Coming Up

By Mike "Mish" Shedlock

Swedish repay their mortgages so slowly that it will take 140 years on average, according to the IMF. 

The International Monetary Fund lamented Friday that Swedish households pay their mortgages so slowly that they are planning to do an average of 140 years.

"Financial stability is [...] reinforced by a steady reduction in repayment schedules - that exceed an average of 140 years," the IMF said in a statement after a mission in Sweden.

This statistic was revealed in March by a government agency, the inspection of the financial sector. It covers loans considered relatively safe, those where the real estate buyer had an initial contribution equal to or greater than 25% of the value of the property and pay the higher monthly interest alone.

According to the Washington-based institution, the Swedish real estate market is a major risk to the economy, along with the eurozone crisis.

"With household debt rising beyond 1.7 times disposable income, a sudden and significant drop in property prices could have an effect on consumption and banks, raising unemployment and further reduce the inflation, and increased the number of non-performing loans and financing costs for banks, "said the IMF.

Why bother paying anything at all? Yet think of the consequences of underwater mortgages on the banking system when an estate does not have enough money to repay loans. A housing bust will have enormous consequences in such a setup.

Wave of Unrest Spreads Across Turkey

Crackdown on Protest in Istanbul Park Sparks Nationwide Demonstrations Against Government Policies

By By JOE PARKINSON, AYLA ALBAYRAK and EMRE PEKER

An unexpected eruption of often-violent civil unrest swept across Turkey over the weekend, the culmination of a simmering clash over social policy between Prime Minister Recep Tayyip Erdogan and a broadening coalition of Turks that threatens the political stability of a key U.S. ally.

The demonstrations mushroomed after a police attack Friday on a small protest against government plans to replace a park in central Istanbul with a housing complex and shopping mall. After two days of clashes around the park and the adjacent Taksim Square, police withdrew Saturday afternoon, leaving protesters to occupy the area

Fueled by social-media images of the showdown, protests ricocheted around Turkey, and by the end of the weekend, hundreds of people had been injured and almost 2,000 detained in demonstrations that spread to half of Turkey's 81 provinces, according to the government.

Mr. Erdogan has won election three times, emboldening him to take a tougher line on everything from alcohol consumption to the media. The Turkish leader hit back over the weekend at critics who increasingly paint him as an autocrat, labeling the protesters "a minority."

"If you can call someone who is a servant of the country a dictator, then it leaves me speechless," he said in a televised speech. "I have no aim other than serving the nation." Mr. Erdogan and his ruling AKP party retain strong public support, and on Saturday he said he could summon five times as many people to the streets as the protesters.

While the protests are unlikely to herald the fall of Mr. Erdogan's government, they represent by far the biggest challenge to his 10-year rule.

The protests also lay bare the challenges Ankara faces as it tries to serve as a model for new Islamist governments in the region seeking to emulate the electoral success of Mr. Erdogan's Islamist-rooted Justice and Development Party. Analysts said the impact could also shift politics in Turkey, an important U.S. ally in a region convulsed by uprisings and political turbulence.

"What we've seen this weekend is a watershed event in Turkey and there's no going back for the people who have taken part," said Sinan Ulgen, chairman of the Center for Economic and Foreign Policy Studies, a research group in Istanbul. "Even if Mr. Erdogan doesn't want to change, we will see more mass protests if his government doesn't listen to this constituency, because these people now realize their power,"

'Frau Europa' becomes 'Frau Deutschland' again

A Setback for the EU’s Centralization Faction

By Pater Tenebrarum 

A German election is drawing close and it is evident in many small things that are happening lately. The latest is that Mrs. Merkel is now apparently distancing herself from her erstwhile demands to create a 'fiscal union' and give the eurocracy in Brussels more powers. Incidentally, her change of heart comes shortly after her summit with France's president Hollande, which indicates that the latter has probably let her know that France is none too happy with the idea either. Since this means that the drive toward more centralization will be slowed down, we take it as good news. 

“German Chancellor Angela Merkel has come out against handing the European Commission more powers, in the clearest sign yet that she is reining in her ambitions to create a "fiscal union" in which euro members cede control of their budgets to Brussels.

The comments, made in an interview with weekly Der Spiegel, come days after Merkel held talks with President Francois Hollande in Paris and the two unveiled joint proposals for the future shape of the euro area, including the creation of a permanent president of the Eurogroup forum of finance ministers.

Merkel spoke out strongly in favour of closer fiscal integration last year, but France and some other euro members have deep doubts about ceding sovereignty — a step which would require politically sensitive changes to the EU treaty — and Berlin appears to have realized that this resistance is too great to overcome for now.

With a German election looming in September and a new anti-euro party threatening to eat into support for her conservative bloc, Merkel may also be adjusting her message for voters at home, many of whom are leery about ceding national powers.

"I see no need in the next few years to give up more powers to the Commission in Brussels," Merkel said in the interview, adding that she agreed with Hollande on EU member states cooperating more on economic issues.

"We are thinking for example of the labour and pension markets but also of tax and social policy. Economic policy coordination in Europe is far too weak, it must be strengthened and this is rather different to giving more competences to Brussels," she said.” 

She still talks about the alleged need for 'more policy coordination', but luckily handing more powers to the bureaucrats in Brussels seems to be off the table for now. It will be interesting to see how the bureaucratic caste ensconced in Brussels will react to these news.  

What If Stimulus Is Self-Defeating?

The more stimulus is applied in today's global economies, the faster it will hit a wall

By Raul Ilargi

It's sort of funny to see a wider - though still faint - recognition developing in the financial world that perhaps it's true that the more stimulus is applied in today's global economies, the faster it will hit a wall. Some may finally even begin to see one or more inbuilt mechanisms at work. I personally think it all harks back to what I've long said, that stimulus by governments and central banks may have a function in certain economic cycles, but that applying it without across the board and thorough debt restructuring is a borderline criminal and useless use (and waste) of present and future taxpayer money. Still, we all know by now what will happen when stimulus starts to stutter: ever more will be blindly thrown at that wall.

News that Japan's main pension fund will increasingly be allowed to move from bonds into - domestic - stocks was received as a piece of real good news this week, after the Nikkei lost some 15% in a few days time. It's still up over 30% for the year though, and that should have all of us wondering, especially the fund managers - and its beneficiaries-: What are the chances that the fund's move into stocks coincides with the Nikkei having surpassed its top? That the increased purchases may perhaps lift it for a few days, but the downward move is in regardless? It's hard not to chuckle a little when you see that the Tokyo government and the fund want to execute the move because bond yields are so low, and at the same time they announce it, those yields triple.

Pensions funds - and non-financial institutions in general - (tend to) always lag behind developments. Needless to say, being always behind can be a very expensive quality to have. Millions of ageing Japanese may not be terribly happy if their pension money is moved into the stock market and it retraces it gains right back to where it came from, for a 30% loss.

And the desperate game of Abenomics will have repercussions throughout the world. Not just in emerging markets, South Africa, Brazil, Thailand et al, that already see a lot of damage from investment banks, who float freely on cheap profits from various QEs, recalibrating their Abezombie money away from emerging economies. No, Abenomics will hit the US and Europe even harder. Because, as our roving reporter VK phrased it: "JGBs are the base of the pyramid in the global bond markets. Risk is priced in JGBs. So Abenomics has destabilized the base of the pyramid in global bond markets. Risk is being repriced accordingly."

Japan is the world's largest creditor. A little over a year ago, Bloomberg wrote :

Investments abroad grew 3.3% to 582 trillion yen ($7.3 trillion) in 2011, rising for the third year, the Finance Ministry said in Tokyo today. Currency gains cut the value of existing holdings but encouraged increased investment abroad. Foreign investors increased Japanese assets by an extra 17 trillion, leaving the net creditor position of the country little changed at 253 trillion yen ($3.25 trillion), the world’s largest, the data showed.

The strange rebirth of liberal England

British politics and the young

Young Britons have turned liberal, both socially and economically. Politicians need to get on their side

The Economist

For the past 170 years The Economist has consistently advocated free trade, punctured government bloat and argued for the protection of individual liberties. It has also been consistently disappointed. Irksomely, political parties tend to plump either for economic liberalism or for social liberalism. Sometimes a small party boldly tries to combine the two—and is rewarded by becoming even smaller. In the United States our creed is so misunderstood that people associate liberalism with big government, when it advocates the opposite.

Yet now Britain, The Economist’s home, the land of Adam Smith (on lead guitar), John Stuart Mill (bass) and William Gladstone (vocals), there is reason for hope. Young Britons have turned strikingly liberal, in a classical sense (see article).

They are relaxed, almost to the point of ennui, about other people’s sexual preferences, drug habits and skin colour. Although, like older Britons, they do not think much of mass immigration, they are tired of politicians banging on about it. As for the row over gay marriage, soon to trouble the House of Lords, they can hardly see the problem.

The young want Leviathan to butt out of their pay cheques as well as their bedrooms. Compared with their elders, they are welfare cynics. Almost 70% of the pre-war generation, and 61% of baby-boomers, believe that the creation of the welfare state is one of Britain’s proudest achievements. Under 30% of those born after 1979 agree. The young are deficit-reduction hawks. They worry about global warming, but still generally lean towards Mill’s minimal “nightwatchman state” when it comes to letting business get on with it: they are relaxed about the growth of giant supermarkets, for example.

It’s only Locke ‘n’ roll, but I like it

This is not just the young being the young. Rather, it is a generational change. In 1987 Britons aged between 18 and 34 were less likely than all other age groups to agree with the proposition that benefit cuts would encourage people to stand on their own two feet: now the young are more hard-hearted than most. They are also more socially liberal than were previous generations at the same stage of life.