>IN FOCUS: Can We Cure the Spanish Flu?

However it’s resolved, Greece’s debt story could soon be largely behind us, but the same can’t be said for the Eurozone crunch. Portugal and Ireland will need assistance from the Eurozone’s bailout fund (ESM/EFSF) beyond 2012, given the bond market’s reluctance to extend them credit. But Spain’s debt and banking troubles are more critical, with the remaining fi repower in the EFSF/ESM too small to cover its financing needs, and its debt—larger than Greece, Portugal and Ireland combined—too weighty for lenders to forgive without a punishing blow to Eurozone financial health. Can we cure the Spanish fi nancial fl u, and if so, will domestic and European policy makers find the antidote in time?


A Housing-Centred Bust
Economically, Spain’s story, centred on excesses in consumption and housing, is closer to that of Ireland or the US than to Greece. While the government can’t be accused of overspending in the years leading up to the recession (Chart 1, left), the private sector was moving down a perilous path. In addition to a housing bubble, households were chronically over-consuming, with industry under-exporting relative to its Eurozone peers (Chart 1, right).


That saw persistent current account deficits financed by borrowing from overseas. Today, Spain’s external net liabilities stand at a whopping 93% of GDP (Chart 2, left) with portfolio-related obligations at roughly 60%—leaving the nation susceptible to financial instability should foreign creditors lose confi dence and pull the plug on funding. Debts accumulated by banks account for the lion’s share—symptomatic of a private sector that was living beyond its means for years (Chart 2, right).


To read report in detail: SPANISH FLU

>Global Economy: Seven Lean Years

■ Why 2013 Won’t Be Better for US


■ Jobless Rate Implies No Fed Hikes Through 2013


■ US Consumers: Where’s the Deleveraging?


■ Gasoline and Food Inflation Should Ease in Response to Commodity Trend


■ Income Squeeze Eases (L), Allowing US
Consumers to Spend and Save (R)


To see full presentation with graphs: The Seven Lean Years
RISH TRADER

>Yuan Revaluation: Not Necessarily Bad for China

It’s diffi cult, these days, arguing that the yuan is not
undervalued. The widely publicized large current account
surpluses and bulging foreign exchange reserves in China
suggest otherwise and continue to provide fodder to
critics of Beijing’s exchange rate policy. While today’s
revaluation of the yuan was inevitable, given the necessity
to rebalance the global economy, the change in Beijing’s
currency policy need not be detrimental to China.

Why Rebalancing Growth is Important
In fact, a revaluation of the yuan could get China to a more
sustainable growth model faster. While China’s rise to
export prominence was made possible by relatively cheap
labour, the latter won’t last forever, given the rising domestic
wages and the ascent of other low-cost centres (such as
Bangladesh and Vietnam). Note also that consumers are
still a small part of the economy relative to traditional
powerhouses like the US, Japan and Germany (Chart 1).
Strengthening its economic base by stimulating domestic
consumption further, while not relying too much on exports,
is a plus for sustainability of growth. An appreciation of the
yuan goes in that direction, with resources being shifted
from exporters to consumers who will be benefiting from
lower import prices and more choice.

Implications for Trade
The potential harm to exporters, wouldn’t be as dramatic
as feared. Any appreciation of the yuan will result in a
less-than-proportionate increase in the dollar price of
a Chinese product in the US. That’s because only the
domestic component of the product will be impacted
(e.g. the value-added by the producer, refl ecting factors of
production in China). The foreign component of the price,
namely the input prices (such as imports from suppliers),
and US costs (like shipping, retailing, and advertising) will
be unaffected. Of course, that’s assuming that supplier
countries like Japan and other Asian nations do not let
their currencies appreciate as steeply as the yuan against
the US$, a reasonable assumption given policies during
the last yuan revaluation.

Numerous studies1 have noted that the domestic content
of Chinese exports is between 35-55%. Even assuming
the upper-bound of that range, a yuan revaluation of
similar magnitude to the one seen from July 2005 to
July 2008 (i.e. 17% appreciation) would, at worst, raise
the price of imports from China by 9%, not signifi cant
enough to cripple China’s overall exports, especially
considering that any appreciation will be spread out over
several years.

That might explain why China coped well the last time
the yuan was revalued. Trade remained relatively healthy
during the 2005-2008 unpegged period, with exports to
Asia nearly doubling and sales to North America soaring
70%, while exports to other regions were even more
impressive, helped by the yuan’s competitiveness (Chart
2). If history is any guide, a small appreciation is unlikely
to have major detrimental impacts on China’s export
market share.

To read the full report: YUAN REVALUATION

>EARLY, BUT FUNDAMENTALLY CORRECT (CIBC)

This report includes charts on following headings:

• A Shock Heard ‘Round the World'
• Bamboo Shoots
• Emerging Markets’ Savings Represents Potential Consumer Spending Power
• Historical Lag in Commodity Prices vs Global Industrial Production
• Global Oil Demand Drop Leaves OPEC with Spare Capacity
• Recent US Indicators Still in Recession Range
• US Economy: Sharp Recession, Sub-Par Recovery
• A Penny Saved ... is a Penny Not Spent
• Fed Not Repeating Japan’s 1990s’ Errors
• Fed Has the Printing Press Running Full Speed
• The Banking Crisis is Over
• Fiscal Stimulus is Massive
• Past War Debts Were Inflationary Look For 5%+ US CPI in 2011
• US Dollar on Long-Term Slide
• Canada’s Recession: Steeper Dive This Time
• Recovery Will Also Be Sub-Par
• Milder Decline in Household Net Worth
• Canadian Banks Less Levered Pre-Crisis
• Non-Financial Debt/Equity Lower in Canada
• Government Dissaving Will More Than Offset Household Saving
• A Structural Shift in Canadian Trade
• C$ Now More Responsive to Commodities
• C$ Move Looks Early vs Commodities
• TSX Cheap vs Long-Term Earnings
• TSX Spring Move Eclipsed Any Pre-Recession-End Rally
• Corrective Rallies Will Be Short-Lived But Canadas Will Outperform
• Gov’t of Canada Issuance Elevated vs Deficits
• Less Pressure from Canadian Borrowing Less Temptation to Inflate Debt Away
• Provincial Deficit Target Near $30 Bn Based on Earlier, More Optimistic Forecasts
• Still Some Room for Spread Narrowing

To see full report: ECONOMIC UPDATE

>A Shock Heard Around the World (CIBC)

To see report: A Shock Heard Round the World