STOCK MARKET WATCH -- Tuesday, 26 June 2012

[Demeter]

25. Money's Retreat Home Threatens Globalization

http://www.nytimes.com/reuters/2012/06/25/business/25reuters-banks-home.html?_r=1&hp

The European banking shock and its aftermath have sent finance and investment running for home, a process that could hurt world growth, globalization and developing economies for years to come.

"There has been massive deleveraging with some home bias, not just in our region but in general. We see a clear and present danger," said Piroska Nagy, director for country strategy at the European Bank for Reconstruction and Development, which monitors private sector financing across the former communist countries of central and eastern Europe.

DANGER OF WHAT? ONE MAY ASK...OF THE END OF OUTSIDERS MEDDLING TO HURT A VICTIMIZED NATION AND ITS PEOPLE?

Policymakers explained the surge in globalization and world growth through the 1990s and 2000s and the parallel rise in accounting imbalances between major economies partly by banks and investors lifting their sights beyond their home countries. Most famously, former Federal Reserve chief Alan Greenspan regularly trumpeted the steep decline in home country investing to defend bloated U.S. current account deficits that had chilled many economists in the years leading up to the credit crisis. This decline in home bias was catalyzed by the erosion of cross-border capital controls worldwide but also by events like the collapse of the Berlin Wall in eastern Europe, the launch of the euro across western Europe and the advance of the internet. For at least some of these reasons, European banks were in the vanguard of cross border finance -- most obviously within the new single currency area but also in the emerging economies of central and eastern Europe as well as Asia and Latin America.

Last year European banks had 10 times the amount of loans outstanding in emerging markets than U.S. banks and lend as much to developing countries as they do to the United States. But, reeling from years of property, credit and sovereign debt slumps, a deepening euro crisis and stiff new international rules on bank balance sheets designed to prevent future taxpayer rescues, European banks are rapidly retrenching. Global lending by banks fell by a whopping $799 billion in the fourth quarter of last year, or 2.5 percent, the biggest fall since the drop seen after the collapse of U.S. investment bank Lehman Brothers three years ago, Bank for International Settlements data showed earlier this month. The drop was led by deleveraging euro zone banks, who cut loans by $584 billion, or 4.7 percent and the lion's share of the pullback was from French, German and Spanish banks who all cut lending by about 5 percent. The process intensified within the euro zone itself in the first quarter of this year and European Central Bank data shows euro zone banks' cross-border holdings of the bloc's government and corporate bonds fell to their lowest in a decade. The IMF forecast in April that European banks could further shrink collective balance sheets by as much $2.6 trillion by the end of 2013 - almost 7 percent of total assets - and about a quarter of this could come by a reduction of lending on top of the sale of securities and overseas assets.

The question for many economists is whether this retreat in global finance is merely a temporary ebb that knocks the froth off the worst credit excess, a peculiarity related to the existential euro crisis or a longer-term decline in international finance that could stall globalization. Philip Lane, a professor at Trinity College Dublin who specializes in globalization, said the initial post credit crisis debate was like distinguishing between "good cholesterol and bad cholesterol", separating productive cross-border flows from more dangerous sorts of lending to offshore bank vehicles and conduits that supercharged and destabilized the credit boom. But he said it was now important the authorities addressed the return to more domestic financing, and initiatives such as a European banking union could be critical to that.

"The incredible boom in cross-border finance in 2002-07 period was just not sustainable and we had that sudden stop in 2008-09. But in the reconstruction of these flows, international institutions need to support them or a return to more national financing is possible," Lane said.

...BIS Economic Advisor Steve Cecchetti told the central bank forum's annual meeting at the weekend that financial globalization was only great up to a point.

"For most people, the term globalization means cross-border trade in real goods and services -something that we would all agree has brought the greatest benefits to a large number of people."

"But this real side of globalization relies on financial intermediaries to fund the trading of all this stuff across borders. And the recent crisis showed how problems both on and off the intermediaries' balance sheets can have very large, very real and very bad implications. Many of us have started to ask if finance has a dark side."

I AM NO FAN OF GLOBALIZATION AS A STRATEGY OR A GOAL..AND ANYTHING THAT STOPS THE WATER SLOSHING IN THE BATHTUB...THE RUSHING ABOUT OF HOT MONEY THAT DESTABILIZES A NATION'S FINANCES AND WRECKS ITS CURRENCY...IS JUST FINE WITH ME. IF THERE ARE PROFITS TO BE MADE IN FINANCING A NATION, THEY SHOULD STAY WITHIN THE NATION TO BE RECYCLED INTO MORE DEVELOPMENT AND TAXES TO SUPPORT THE COMMON WELFARE OF ITS PEOPLE. NATIONS ARE NOT MINES FROM WHICH PROFITS ARE TO BE EXTRACTED.