the global recession: the way down, the way out
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The Global Recession: The Way Down, The Way Out. Peter Zeihan Stratfor April 21, 2009. US maritime transport network Mississippi/Missouri/Ohio/ Red/Tennessee Ragged coastline (Intercoastal and San Fran) Contiguous Midwest Lack of security competition - PowerPoint PPT PresentationTRANSCRIPT
The Global Recession:The Way Down,
The Way Out
Peter ZeihanStratforApril 21, 2009
The Geography of Economy:The United States
US maritime transport network Mississippi/Missouri/Ohio/
Red/Tennessee Ragged coastline (Intercoastal
and San Fran) Contiguous Midwest
Lack of security competition Canada -- too cold, only useful
maritime network is shared Mexico -- too
dry/mountainous, no maritime network
American Implications: Free Market Easy work – building a transport network –
is already done Lack of security needs frees up resources United States extremely capital rich Lack of any pressing national
requirements allows capital to flow wherever the market decides
The Geography of Europe Peninsulas Islands Mountains Coastlines Rivers Northern Plain Very small
space
Result:
Trade
and
War
European Implications: Chaos and National Plans No clear sovereign Different geographies tweak governance demands and
tools in different directions Collectively Europe has a fairly good natural transport
network making it moderately – but unevenly – capital rich
The German example: Rivers and coasts not naturally integrated, all shared Successful economic development means integrating with security
competitors and compensating for a complex geography Germany must have a national development plan for the allocation
of capital
Chinese Geography
Yellow River difficulty Yangtze Basin is
subtropical Coast is rugged or
muddy – few natural ports
Inland region very different culturally
Chinese Implications: Subsidized Finance Result is a country that isn’t deeply integrated
and doesn’t hold together well Unification becomes a political imperative, but is
a geographically complicated task Must use infrastructure (expensive!) to attempt
to bridge the differences and exert central control – the costs make China capital poor
Need to give the regions incentives to defer to the center => economic development via (very) cheap money
Chinese Implications: Subsidized Finance Maximize employment, firm size, market
share, activity and throughput Capital pooled into the state’s hands,
funneling it to achieve national goals; interest and payments negotiable
Debt levels, profitability and return on capital irrelevant
Remember Japan?
Japan is the Best Case Scenario
China’s banks are far worse off than Japan’s (minimal international exposure)
China is the most financially penetrated state in Asia (save Taiwan)
China has (so far) burned over $600 billion in attempting bank bail outs
No Chinese NPLs have been disposed of 0
10
20
30
40
50
bill
ion
s U
SD
/ ye
ar
Free ports Asia Europe US/Oz/Canada
The Way Down: The United States Subprime trigger ABS scared banks Result was a liquidity
crunch that has since been corrected
Now ‘just’ a ‘normal’ recession
No systemic weakness in the American system (not even in housing)
The Way Down: Europe Total European
exposure to American ABS is probably about $100 billion
The Way Down: Europe Europe lacks positive
demographics
The Way Down: Europe Carry trade lending Foreign denominated
wholesale/retail loans
The Way Down: Europe Overexposure to
Central Europe Austria $300 billion Sweden $135 billion Greece $63 billion Italy $212 billion
The Way Down: Europe Credit binge
Freshly euroed states The benefits of EU
affiliation No debt from Soviet
era
The Way Down: Europe EBRD already
estimates that over 20 percent of all loans in Central Europe are non-performing
Spanish NPLs already at 4 percent
No meaningful program to address banking failures has begun
The Way Down: China
Did not suffer a liquidity or financial crunch Exports, exports, exports
Cannot recover until her customers do
The Way Down: ChinaEurope down nearly 30% China down over 50%
Total Exports
50.0
70.0
90.0
110.0
130.0
150.0
170.0
190.0
210.0
230.0
250.0
Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09
EU27 (billion EUR)
China (billion USD)
Ready for the good news slide?
The Way Out: United States
MoM Inventories and Retail Sales
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
Jan
ua
ry
Fe
bru
ary
Ma
rch
Ap
ril
Ma
y
Jun
e
July
Au
gu
st
Se
pte
mb
er
Oct
ob
er
No
vem
be
r
De
cem
be
r
Jan
ua
ry
Fe
bru
ary
Ma
rch
Ap
ril
Ma
y
Jun
e
July
Au
gu
st
Se
pte
mb
er
Oct
ob
er
No
vem
be
r
De
cem
be
r
Jan
ua
ry
Fe
bru
ary
Ma
rch
2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2008 2008 2008 2008 2008 2008 2008 2008 2008 2008 2008 2008 2009 2009 2009
Inventories
Retail Sales
The Way Out: Europe Germany is taking the long view
High-value export-oriented economy means local stimulus will not work, so why try?
Banks take long-term corporate view – as opposed to short-term retail – so are not bearing brunt of recession
September election and EMU limit options Impose conservative German lending
policies on the rest of Europe Negligible effort to addressing the wider
banking problem
The Way Out:Europe
General recession now shifting the burden to non-capital market banks
So even those who were healthy are now coming under extreme pressure
Banks far more important for capital generation in Europe than in the US, and so they get hit much harder in recessions
IssuerCDS-Implied Rating Gap
Moody's Sr Unsec or Equiv Rating Domicile Outlook
Allied Irish Banks, p.l.c. -8 Aa3 Ireland Not On WatchBank of Ireland -8 Aa3 Ireland Not On WatchEFG Eurobank Ergasias S.A. -7 A1 Greece Not On WatchErste Group Bank AG -7 Aa3 Austria Not On Watch National Bank of Greece S.A. -7 Aa3 Greece Not On Watch Piraeus Bank S.A. -7 A2 Greece Not On Watch Banco Sabadell, S.A. -6 Aa3 Spain Not On Watch DNB NOR Bank ASA -6 Aa1 Norway Not On Watch HSH Nordbank AG -6 A1 Germany DNG Natixis -6 Aa3 France DNG Rabobank Nederland -6 Aaa Netherlands Not On Watch Raiffeisen Zentralbank Oesterreich AG -6 A1 Austria Not On Watch Banco Bilbao Vizcaya Argentaria, S.A. -5 Aa1 Spain Not On Watch Banco Santander S.A. (Spain) -5 Aa1 Spain Not On Watch KBC Bank N.V. -5 A1 Belgium Not On Watch Nordea Bank AB -5 Aa1 Sweden Not On Watch Swedbank AB -5 A1 Sweden Not On Watch UBS AG -5 Aa2 Switzerland Not On Watch Barclays Bank PLC -4 Aa3 United Kingdom Not On Watch Credit Suisse Group -4 Aa2 Switzerland Not On Watch Danske Bank A/S -4 Aa3 Denmark Not On Watch Deutsche Bank AG -4 Aa1 Germany Not On Watch DZ BANK AG Deutsche ZG -4 Aa3 Germany Not On Watch HSBC Holdings plc -4 Aa2 United Kingdom Not On Watch Lloyds TSB Bank Plc -4 Aa3 United Kingdom DNG Banco Comercial Portugues, S.A. -3 Aa3 Portugal DNG Banco Espirito Santo, S.A. -3 Aa3 Portugal DNG BAWAG P.S.K. -3 Baa1 Austria Not On Watch Bayerische Landesbank -3 Aa2 Germany DNG Credit Agricole S.A. -3 Aa1 France Not On Watch HBOS plc -3 A1 United Kingdom DNG Intesa Sanpaolo Spa -3 Aa2 Italy Not On WatchNorddeutsche Landesbank GZ -3 Aa2 Germany Not On Watch Royal Bank of Scotland Group plc -3 A1 United Kingdom DNG SEB -3 A1 Sweden Not On Watch UniCredit SpA -3 Aa3 Italy Not On Watch Commerzbank AG -2 Aa3 Germany Not On Watch Dresdner Bank AG -2 Aa3 Germany Not On Watch Fortis Bank Nederland (Holding) N.V. -2 A1 Netherlands Not On Watch Fortis Bank S.A./N.V. -2 A1 Belgium Mixed ING Groep N.V. -2 A1 Netherlands Not On Watch Landesbank Berlin AG -2 A1 Germany Not On Watch Standard Chartered PLC -2 A3 United Kingdom Not On Watch BNP Paribas -1 Aa1 France Not On Watch Societe Generale -1 Aa2 France Not On Watch WestLB AG -1 A2 Germany Not On Watch
The Way Out: China Efforts to stimulate domestic demand
failingPeople who farm by hand only need so many
white goods / cars Chinese banks may not be as capital rich
as we thinkThe story of the AMCs – the $1 trillion
questionCurrent overlending – the other $1 trillion
question
The Way Out: China
Outgoing Loans of Chiense Banks (monthly)
-100
-50
0
50
100
150
200
250
300
Feb
-07
Mar
-07
Apr
-07
May
-07
Jun-
07
Jul-0
7
Aug
-07
Sep
-07
Oct
-07
Nov
-07
Dec
-07
Jan-
08
Feb
-08
Mar
-08
Apr
-08
May
-08
Jun-
08
Jul-0
8
Aug
-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan-
09
Feb
-09
Mar
-09
bil
lio
ns
US
D
All this to hit zero percent growth?
Sichuan: The Place to Watch
Inland (poor, worst run banks) Large source of migrant labor
(which is returning home) Absorbing migrant labor from
Tibet/Xinjiang (which is being sent home)
Mixed ethnically (much Han resentment)
2008 earthquake (recovery botched)
Q&A