A credit crisis occurs when there is a reduction in the availability of loans and/or funding for a given entity. Generally, this involves the market losing confidence in the ability of the borrower to pay back borrowed funds. This leads to lower funding ability and higher interest rates. The credit crisis then moves into a liquidity crisis, as the borrower can’t pay the higher rates and is unable to fund daily operations. A credit crisis could then lead to insolvency.
Politicians in Cyprus are pushing for a government vote on a tax on all bank deposits in the country—6.75% on deposits up to 100,000 euros, and 9.9% on deposits above that amount. (Source: Wall Street Journal, March 18, 2013.) This step by one of the smallest nations in the eurozone could propel economic problems in the region to another level.
What was the cause of the proposed action to seize a percentage of citizen bank deposits?
Cyprus has been experiencing a credit crisis with its banks becoming illiquid, so it needed money. Despite the European Central Bank (ECB) taking the “it will do whatever it takes” stance to get the eurozone going again, Germany and the International Monetary Fund (IMF) argued that the bailout to the nation should be limited to only 10 billion euros, though Cyprus needed 17.5 billion euros. So, Cyprus was sent looking for 7.5 billion euros on its own.
Even though Cyprus is one of the smallest nations in the eurozone, this country’s move to seize a percentage of citizen bank deposits goes to show what can be the next move for other countries in that region that are in financial trouble. It is Cyprus now; it could very well be Greece, Spain, Italy, or Portugal next.
Why could other countries be next? Because the debt-infested nations of the eurozone are still struggling.
Greece is in a depression. Spain, the fourth-largest nation in the eurozone, is experiencing staggering unemployment. The number of unemployed in Spain is increasing to a point where the social security system is running out of contributors. (Source: Financial Post… Read More
Export-oriented provinces in the Chinese economy have turned pessimistic and anticipate exports will only grow at the rate of five percent this year. In 2012, they targeted an export growth rate of eight percent to 10%.
What’s troublesome about this is that exports from the Chinese economy account for 20% of the country’s gross domestic product (GDP). This means that, if exports from China to other countries decline, the Chinese economy will suffer an economic slowdown. (Source: Epoch Times, February 7, 2013.)
The Chinese economy has become fragile due to the economic slowdown in the global economy. Its biggest trading partner, the eurozone, is still suffering, while other areas have anemic demand.
As export volume falls in China, it is creating trouble for China’s manufacturing sector. The Chinese Purchasing Managers’ Index (PMI) declined to 50.4 in January from 50.6 in December of 2012. (Source: National Bureau of Statistics of China, February 1, 2013.) A reading above 50 means expansion in manufacturing, while a reading below 50 means contraction. January’s reading is not far from the pivot point into manufacturing contraction.
Getting a read on the Chinese economy is not that easy. Some say statistics out of China are not that reliable. But here is the official word from the Chinese government: in the third quarter of 2012, GDP in the Chinese economy rose 7.4% from a year earlier—the slowest growth rate in three years. (Source: China Daily, December 30, 2012.)
While time and more data will make the picture clearer, with Chinese exports stumbling, a contraction in manufacturing activity could be next for the Chinese economy.
And it’s … Read More
The eurozone credit crisis is taking center stage once again. As I have been saying in these pages, it is far from over, even though the European Central Bank (ECB) has announced that it will do “whatever it takes” to save the eurozone. Economic conditions in the region are still deteriorating.
The debt-infested countries in the eurozone are reaching their lows with widespread economic slowdown, but I am more concerned that the stronger nations are starting to show signs of struggle as well.
France, the second biggest economic hub in the region, is in a period of next to no growth. The country’s unemployment is higher than 10% and increasing. The International Monetary Fund (IMF) expects growth between 0.3% and 0.4% for the French economy this year. (Source: Wall Street Journal, February 12, 2013.)
In the fourth quarter of 2012, the eurozone countries saw the steepest quarterly decline in industrial production in more than three years. Industrial production in the eurozone declined 2.4% in the fourth quarter, compared to a meager increase of 0.2% in the third quarter—the sharpest decline since the first quarter of 2009. (Source: Wall Street Journal, February 13, 2013.)
Looking ahead, it seems the credit crisis in the region is there to stay. According to a study conducted by Ernst & Young, banks in the eurozone have a massive amount of bad loans sitting on their books. The auditing firm estimated that these bad loans make up a grand total of $1.23 trillion, or 7.6% of all the loans issued in the region. (Source: Deutsche Welle, February 11, 2013.)
Dear … Read More
America’s high unemployment rate could be the biggest hurdle faced by the U.S. economy today. Millions of Americans are still unemployed and are unable to find jobs thanks to the credit crisis of 2008.
The “official unemployment rate” as reported by the Bureau of Labor Statistics (BLS) stood at 7.8% in December 2012. Before the crisis began in the U.S. economy, the same rate was as low as 4.4% in May of 2007. The current unemployment rate is 77% higher now than it was four and a half years ago.
Unfortunately, looking ahead, the high unemployment rate in the U.S. economy doesn’t seem like it’s going to let up.
The problem at hand is that economic conditions in the U.S. economy are poor and companies are floating in rough seas. Corporate earnings growth is under pressure. And, as a result of poor earnings growth, a trend is emerging that will force the unemployment rate to increase.
For example, Morgan Stanley (NYSE/MS) recently announced it is planning to cut staff by six percent. The reason: poor market conditions. The company will lay off employees at all levels, but jobs at the senior level will undergo more scrutiny. (Source: CNN Money, January 9, 2013.)
Similarly, it wasn’t too long ago that Citigroup, Inc. (NYSE/C) announced it was cutting 11,000 jobs from its current workforce. These jobs account for about four percent of its workforce. The bank didn’t identify how many jobs will be cut in the U.S. economy, but it plans to close down at least 44 of its bank branches. (Source: USA Today, December 5, 2012.)
Other major companies, … Read More
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