Turkish Forum

Tag: Economic Crisis

  • Turkey: IMF Financing Needed By The Fall

    Turkey: IMF Financing Needed By The Fall

    Moody’s Says Workers Rated Some Securities Incorrectly

    May 27, 2009 Moody’s Investors Service said May 27 that Turkey will need to secure a loan deal with the International Monetary Fund (IMF) by this fall, Hurriyet reported. Moody’s said Turkey can go without an IMF financing program through the summer, but pressure on its external deficits will make a loan accord with the IMF necessary. Turkey has been negotiating with the IMF, but an agreement has yet to be made.

    Moody’s Corporation
    7 World Trade Center 250 Greenwich Street New York NY 10007
    Phone: +1 (212) 553-0300

  • Obama Targets Overseas Tax Dodge

    Obama Targets Overseas Tax Dodge

    obama-flag

    Plan Would Crack Down On Individuals, Firms With Money Abroad

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    Video
    Obama Announces Plan to Close Tax Loopholes
    President Barack Obama is proposing to close tax loopholes for companies and individuals with operations or bank accounts overseas.
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    By Lori Montgomery and Scott Wilson

    Washington Post Staff Writers
    Tuesday, May 5, 2009

    President Obama yesterday announced a major offensive against businesses and wealthy individuals who avoid U.S. taxes by parking cash overseas, a battle he said would be fought with new tax laws, new reporting requirements and an army of 800 new IRS agents.

    This Story
    • Obama Targets Overseas Tax Dodge
    • Highlights of New Tax Initiatives…

    During an event at the White House, Obama said his proposal would raise $210 billion over the next decade and make good on his campaign pledge to eliminate tax advantages for companies that ship jobs abroad.

    “I want to see our companies remain the most competitive in the world. But the way to make sure that happens is not to reward our companies for moving jobs off our shores or transferring profits to overseas tax havens,” Obama said, flanked by Treasury Secretary Timothy F. Geithner and Internal Revenue Service Commissioner Douglas Shulman.

    The nation’s largest business groups immediately assailed the proposal, arguing that it would subject them to far higher taxes than their foreign competitors must pay and ultimately endanger U.S. jobs. Key Democrats were cool to the plan, and said Obama’s ideas should be considered as part of a broader effort to streamline the nation’s complex corporate tax code.

    “Further study is needed to assess the impact of this plan on U.S. businesses,” Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee, which has jurisdiction over U.S. tax law, said in a written statement. “I want to make certain that our tax policies are fair and support the global competitiveness of U.S. businesses.”

    Yesterday’s announcement offered the first details of a tax plan that was sketched out in the $3.4 trillion budget request that Obama sent to lawmakers earlier this year and that Congress approved last week. If the measures do not survive congressional scrutiny, the lost revenue would increase already-elevated deficit projections, unless lawmakers find money elsewhere.

    Obama said his plan could serve as “a down payment on the larger tax reform we need to make our tax system simpler and fairer.”

    The proposal takes aim at what corporate executives consider to be one of the most critical features of the U.S. tax code: permission to indefinitely defer paying U.S. taxes on income earned overseas.

    Currently, U.S. companies can avoid paying taxes on foreign profits until they bring the money back home. So a U.S. company doing business in Ireland, for example, must pay the Irish tax of 12.5 percent, like every other company doing business in Ireland. But the U.S. firm would owe an additional 22.5 percent to the U.S. Treasury (the difference between Ireland’s tax rate and the 35 percent U.S. tax rate) unless it reinvests the money overseas.

    The United States is the last major economic power to tax the profits of locally headquartered companies if that income is earned abroad. Other nations, including most recently Japan and Britain, are moving to a territorial system that taxes only corporate profits earned within their borders.

    Instead of following that trend, Obama proposes to move in the opposite direction. He argues that the current system gives tax breaks to U.S. multinationals at the expense of companies that operate solely on American soil. In 2004, the most recent year for which statistics are available, U.S. multinationals paid an effective U.S. tax rate of just 2.3 percent on $700 billion in foreign profits, according to the administration.

    “It’s a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York,” the president said yesterday.

    To level the playing field, Obama would bar firms from taking deductions for expenses that support their overseas investments until they pay U.S. taxes on the profits. He would also crack down on firms that overstate their foreign tax bills. And he would reverse a Clinton-era rule known as “check the box,” which permits firms to more easily transfer cash between countries. In practice, Obama officials said, “check the box” has been used to shift income away from higher-tax countries and into tax havens such as Bermuda and the Cayman Islands, allowing firms to reduce their tax bills both at home and abroad.

    Those provisions would take effect in 2011 and would raise about $190 billion by the end of the next decade. In return, Obama proposes to make permanent an existing tax credit for companies that spend money on domestic research and development programs, worth about $75 billion over the next decade.

    Obama also proposes to crack down on wealthy people who evade taxes through offshore bank accounts, primarily by targeting financial institutions in tax-haven jurisdictions. That plan, which would net another $9 billion over the next decade, appears to have few opponents.

    By contrast, more than 200 U.S. companies and trade groups have signed a letter asking congressional leaders to oppose Obama’s proposal to limit their ability to defer U.S. tax payments. The letter, signed by Alcoa, General Electric, McDonald’s and Microsoft, among others, warned that restricting the deferral rules would make it difficult to compete abroad.

    The U.S. Chamber of Commerce also denounced Obama’s plan. And John Castellani, president of the Business Roundtable, a coalition of the nation’s largest firms, called it “the wrong proposal at the wrong time for the wrong reasons” that will “make us less competitive in the international marketplace, where, by last count, 95 percent of the world

    Rosanne Altshuler, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, said some of Obama’s proposals have merit. But “the big question mark is whether limiting deferral will lead to more jobs in the U.S., and it’s not clear to me that this is what will happen.” Instead, Altshuler said, the result may be to create a tax advantage for U.S. firms to be acquired by foreign owners, an “unintended consequence” that “would probably be bad.”

    “There’s a big difference between abusive tax avoidance and legitimate tax policy that recognizes the global economy,” said Sen. Charles E. Grassley (Iowa), the senior Republican on the Senate Finance Committee. “To the extent the president continues on the road of cracking down on tax abuse, he can count on my support. But if he’s using tax shelters as a stalking horse to raise taxes on corporations at the cost of U.S. jobs, he’ll lose me.”

  • Sell in May and Go Away – John Mauldin

    Sell in May and Go Away – John Mauldin

    Thoughts from the Frontline Weekly NewsletterBack to the Future Recession by John Mauldin
    May 1, 2009

    In this issue:
    Sell in May and Go Away?
    The End of the Recession?
    Is the US Consumer Back?
    A Dangerous End Game
    A Few Thoughts on Swine Flu
    The old adage that one should “sell in May and walk away” has been around for years. I mentioned that bromide about this time last year, urging readers to head for the sidelines if they had not already done so. I was also suggesting a strategic retreat in August of 2006 (after which the markets went up 20% before plummeting). In this week’s letter we look at the actual data and offer up a fresh viewpoint. Then we turn our eyes to the recent GDP numbers, which were awful, though many took comfort in the apparent rise in consumer spending. Are Americans back to their old ways? It will make for an interesting letter.

    Sell in May and Go Away?

    My friend and South African business partner Prieur du Plessis recently updated a chart on monthly stock market returns since 1950. It clearly shows that the November through April periods have on average been superior to the May through October half of the year. (To read his very interesting blog you can go to

    And the difference is quite significant. As Prieur notes, the “good” six-month period shows an average return of 7.9%, while the “bad” six-month period only shows a return of 2.5%. Of course, selling creates taxable events, which can hurt your returns.

    Plus, you never know when the markets are going to go down and when they will be up. There can be a lot of variance from year to year. For instance, in 2007 the markets were up during the summer by 4.52% and down during the “good” period by -9.62%, which is opposite the average pattern. Of course, the markets did go down by 30% after May 1 last year and down another 5% since then. That is what bears markets can do.

    Which caused me to wonder. The last 59 years have seen two significant secular bull markets (roughly 1950-1966 and 1982-1999) and two secular bear markets (1966-1982 and 2000-??? — the one we are in now). I wondered if the pattern changed during the bear cycles, so I shot a late-night note off to Prieur and came in the next morning and had my answer.

    It made a significant difference. May through October in secular bear cycles has been ugly. Look at this graph:

    And just for fun, let’s look at the monthly numbers since the present secular bear market began in 2000. So far, this has been a lot worse than the 1966-82 cycle, although we have not yet had the recovery phase from the current doldrums, which will likely make the overall numbers look better in 4-5 years.

    As noted above, these graphs simply give us past trends and not an absolute forecast. But they do provide food for thought. There are times when you should be cautious and times when you should throw caution to the wind. I think this is the former. While some pundits are talking about green shoots and the second derivative of growth, this economy may be worse than their rosy forecasts of the end of the recession, as we will see in a few paragraphs.

    The End of the Recession?

    Let’s revisit 2000 and 2006. The yield curve was inverted in the late summer and early fall of both years. By that I mean that short-term yields were higher than long-term yields. When that happens for longer than 90 days, a recession has always followed within 12 months. (I wrote numerous e-letters on the topic. You can go to the website and search for “Mishkin,” one of the authors of a Fed paper on the yield curve.) I wrote in this letter on both occasions that it was time to get out of the market, as the stock market drops an average of 43% during a recession.

    There is a YouTube of me on CNBC in August of 2006 on Larry Kudlow’s show. I was forecasting a recession in 2007 based on the inverted yield curve. And if there was going to be a recession, I reasoned, then a bear market would follow. Larry and John Rutledge basically noted that “this time it’s different,” because the reasons for the inverted yield curve were different. And the market did rise another 20%+ for over 12 months.

    There was a recession, but it did not come until 15 months later, in late 2007. The yield curve was right in forecasting a recession, but the timing was different this cycle. If you had gotten out in August of 2006, you were not terribly happy 12 months later; but today you are still way ahead, plus the gains on your bonds and alternatives.

    On October 5 of 2007 I wrote about what I saw coming as a “Slow Motion Recession.” I was more convinced than ever we were either in a recession or soon would be. As it turned out, we were. But at the time there was a lot of criticism from a lot of analysts. Christopher Amberger did a particularly scathing piece (which was at least witty) on YouTube on October 10, suggesting that the concept of a recession was nonsensical and there were still plenty of opportunities in the market. (Oh, and buy his newsletter to find out what they are). http://www.youtube.com/watch?v=UjAK0s9I8vA The market topped two days later.

    The point is that it is more important to get the general direction right than to be right on the specifics. In August of 2006 I was seeing a modest recession in the future. As time went on, I became increasingly bearish. But whether it was to be a mild recession or a major one, the advice would have been the same. You do not want to get caught long the market before a recession.

    Today, there are those who say the stock market will start rising six months before the economy does. And maybe it will. I don’t know. The predisposition of this market is down. Valuations are not at a level that has spawned major bull markets in the past. At the beginning of real bull markets, volume is strong and rising. Now it is weak (modest at best) and shows no real sign of becoming strong, especially going into summer.

    Further, this rally has all the earmarks of a major short squeeze. Regulators have recently (and correctly) been enforcing short selling rules that require stock to be delivered and settled on short trades. This may be a one-time event. When the short squeeze is over, the buying will stop and the market will drop. Remember, it takes buying and lot of it to move a market up but only a lack of buying to create a bear market.

    Corporate earnings are likely to go even lower, as consumer spending is likely to get weaker in the coming months. Capacity utilization is at its lowest point since they began tracking it. The National Federation of Business says a recent survey shows none of the responders plans to raise prices, which is not a sign of business strength.

    Banks are not yet lending, and the past quarter’s positive performance was mostly accounting gimmicks. Citigroup, for instance, said they made $1.6 billion. They did this by booking a one-time gain of $2.7 billion, because the value of Citigroup bonds have fallen (!), giving them the theoretical possibility of buying back their debt at a discount. And with consumer and credit card loans showing more weakness, Citi decided to REDUCE its loan loss reserves, allowing it to show another $1.3 billion in profit. And then there was the profit of $400 million from the new mark-to-market rules, which allowed them to produce a profit on “impaired assets.” Without all these games, there would have been a loss of $2.8 billion.

    Maybe this time it’s different. But when I survey the economic landscape, I see lots of opportunity for disappointments and missed targets. And bear market rallies are killed by disappointments and missed expectations.

    To be long this market going into summer you need to be brave or have very serious stops on your portfolio. I think the possibility of missed expectations at the end of the second quarter is high. It could be ugly.

    Is the US Consumer Back?

    The headlines told us that even as the economy fell an annualized 6% in the first quarter, consumer spending rose by 2%. Given that consumer savings climbed to 4.2%, unemployment rose, and income was down, how did consumer spending rise? To get the real picture, you have to dig into the numbers. (Thanks to 82-year-old, long-time reader Paul Miller for doing the slicing and dicing of the data at his excellent blog https://musingsbymiller.wordpress.com/.)

    First, the headline numbers are inflation-adjusted. Consumer spending in actual dollars rose $28 billion. But since prices went down (deflation), the “real” or after-inflation/deflation number shows up in the headlines as $44 billion.

    But where prices went down makes the real difference. Gasoline and other energy costs were down $50 billion, allowing consumers to spend on other items. Over the last two quarters energy costs are down almost $200 billion from the second and third quarters, making a huge difference. But now the “tax cut” from energy is largely gone, as prices have stabilized.

    Paul notes, “But … now … the gasoline tax cut has dissipated, and coming to the rescue are the Obama administration’s tax cuts. In fact, the cuts began to be felt in the first quarter. Personal income declined modestly in the first quarter, by $60 billion, or a 2% annual rate. But personal taxes were down by $193.5 billion, some part of which was the result of the tax cuts, so that disposable income rose at a 5% annual rate. Putting taxes and lower gasoline prices together gave consumers $143.5 billion more to spend or save than they would otherwise have had, which accounted for the rather amazing performance of consumption in the face of immense job losses.”

    And going further into the GDP numbers, there is an interesting statistic. Imports fell more than exports, mainly due to oil. The net trade deficit was only about $26 billion last month. Falling prices in imports, and especially oil, actually added about 3% annualized to the GDP number. Without that boost, the number would have been far more ugly.

    That being said, we are very likely to see better numbers in the future, and maybe even a positive one in the 4th quarter. But a large part of that will be statistical. For instance, housing construction is now down to 2.5% (or thereabouts) of GDP. Drops in housing construction have contributed almost a negative 1% a quarter for the last year. Even if housing construction goes down another 10-20%, it is becoming a very small piece of the puzzle and is not likely to be a big drag on future GDP.

    Inventories, though, have been a large drag on the economy for the last two quarters. While we could see inventories drop somewhat this quarter, as the ISM manufacturing number is still significantly negative, they will probably not drop a lot more in the third and fourth quarters.

    There are more stimuli and tax cuts on the way, and they will start to have an effect, as individuals will have more disposable income, whether to pay down debt, save, or spend.

    But that positive will be balanced by rising unemployment, likely to hit 10% or more by the end of the year. If you count those who are part-time workers wanting full-time work or who are discouraged workers, unemployment is over 15% today.

    A Dangerous End Game

    The Fed and the Obama administration are playing a dangerous game. The Fed is going to print trillions of dollars to forestall deflation and try to re-ignite the economy. But for a variety of reasons we will go into next week, a real, sustainable recovery may be a few years away. What happens when the market start balking at high and unsustainable national deficits? What happens when inflation (finally) does return? Can the Fed remain independent and take back the money it is printing in the face of what will likely be a tepid recovery? And if they don’t, what happens to the dollar?

    Next year, we will be entering what will certainly be the most dangerous era in my lifetime for the US economy. It is not clear what will happen. There are a lot of paths that can be taken, though some are more likely than others. For those who are convinced that high inflation and a falling dollar are absolutely, unequivocally in the future I have just one word: Japan.

    Yes, there are differences, but there are a lot of similarities. While I think the most likely outcome is a long Muddle Through recovery, the likelihood of a lost decade of deflation a la Japan is a very real potential outcome. And the possibility of stagflation and a seriously impaired dollar is also quite real.

    Investors, businessmen, and entrepreneurs need to be as nimble as possible. A free market will figure out what paths to take, and I am still optimistic about the long term. But we have some very dangerous times in front of us, and we need to be realistic.

    And before I close, let me make a few comments about the Chrysler and GM issues. I tell my kids all the time that actions have consequences. If I hold senior secured debt of a company and the government tells me I have to take less than unsecured junior debtors, I am not going to be happy. I may have been dumb to make the loans in the first place, but I did it under a very specific contract and the rule of law.

    If the Obama administration arbitrarily changes those rules to favor a political class (unions), then that is going to have a chilling effect on future lending to all corporations. As an aside, they are spending $12 billion to save 54,000 Chrysler jobs (at $22,000 per job). With 600,000 jobs a month being lost, why are these 54,000 jobs more special than those of the rest of the unemployed, who get a fraction of that amount in unemployment benefits?

    Actions have consequences. The lenders who are forcing the Chrysler deal into bankruptcy court are not all “predatory hedge funds.” They are mutual funds, pension funds, and other financial firms with small stakeholders as their investors.

    Cerberus, the hedge fund that originally bought Chrysler, deserves to lose their money. They made a bad investment. But those who lent money deserve to be treated in accordance with the contracts they signed.

    Demonizing investors and businessmen is hardly helpful. They are precisely the people we need to help get this economy moving. Governments don’t create true job growth, businesspeople do, and mostly small businesses. I am not certain why small business owners, the job creation engine of the country, should see their taxes raised in order to protect bond holders of automobile companies or banks, or for union jobs to be preserved in companies that are clearly not competitive. But that is just my final thought late at night, before I hit the send button.

    OK, one more thought. If Chrysler couldn’t figure out how to make efficient cars from their partnership with Daimler-Benz, are they now going to become viable through a partnership with Fiat, which has been on the verge of bankruptcy for the last decade? Really? GM paid $2 billion in penalties to Fiat in 2005 so as to not be forced to buy them. And Fiat gets 20% for no cash?

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    A Few Thoughts on Swine Flu

    Intellectually, I know that flu is something that we live with every year. According to the Centers for Disease Control, seasonal flu infects between 15 and 60 million Americans each year (5% to 20%), hospitalizes about 200,000, and kills about 36,000. That comes out to over 800 hospitalizations and over 250 deaths each day during flu season.

    Worldwide deaths from “regular” flu are between 250,000 to 500,000 a year. In the last SARS virus “epidemic” in 2003, there were around 8,000 deaths worldwide but none in the US.

    Swine flu has been diagnosed 160 times in ten countries, plus several hundred more in Mexico. The toll is almost sure to rise a great deal, but will it reach the level of normal, everyday flu? I hope not, and I rather doubt it, at least based on the recent SARS scare.

    But that is all an intellectual, distanced, nuanced concept. The real world is a little different. This morning I went to wake up my son to get ready to take him to school. For a real change, he was already up. He had been throwing up, he had a sore throat, and his head was warm. We finally found the thermometer and took his temperature. It was 100, and 20 minutes later had risen a degree.

    We got into the car and went to the local “Doc-in-the Box.” (For non-US readers, that is a local private-care clinic that will take walk-up patients without an appointment.) After a few tests, which they can now do in a few minutes, they determined it was not flu or strep throat. It was just some bug he had come down with that needed a course of antibiotics. We got the medicine and went home.

    On the way back I asked him if he was worried about whether he had swine flu. The day before, his school had cancelled a field trip, and a local large school district (Fort Worth) had simply closed for a week after one diagnosed case.

    “Yeah, Dad, I was worried a little. Glad it’s not the flu.” And Dad was, too. Statistics, whether financial or medical, become meaningless when it’s personal.

    Have a great week, and stay healthy!

    Your planning to enjoy his May through October analyst,

    John Mauldin
    John@FrontLineThoughts.com

    Copyright 2009 John Mauldin. All Rights Reserved

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  • U.S. mortgage rates nudge closer to record low

    U.S. mortgage rates nudge closer to record low

    • Thursday April 23, 2009, 11:01 am EDT

    By Julie Haviv

    Reuters – A prospective home buyer tours a condominium for sale in Medford, Massachusetts, April 2, 2009. REUTERS/Brian Snyder …

    NEW YORK (Reuters) – U.S. mortgage rates fell in the latest week, nudging closer to a recent record low, helped by government efforts to bring rates down to levels that will spur demand and help the hard-hit housing market begin to recover.

    Interest rates on U.S. 30-year fixed-rate mortgages fell to 4.80 percent for the week ending April 23, down from the previous week’s 4.82 percent, according to a survey released on Thursday by home funding company Freddie Mac.

    Three weeks earlier, mortgage rates were 4.78 percent, which was the lowest since Freddie Mac started surveying them in 1971.

    The drop is a glimmer of hope for the U.S. housing market amid otherwise dismal data.

    The National Association of Realtors on Thursday said the pace of sales of existing homes in the United States fell 3.0 percent in March to a much lower-than-expected annual rate of 4.57 million units.

    “Although long-term mortgage rates eased slightly this week, ARM rates remain elevated relative to those fixed-rate mortgages,” Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement.

    The battered U.S. housing market, which is in the midst of its worst downturn since the Great Depression, is both the source and a major casualty of the credit crisis. A recovery for the market could portend a turnaround for the United States, the world’s largest economy.

    (Additional Reporting by Lucia Mutikani)

  • 10 Countries in Deep Trouble

    10 Countries in Deep Trouble

    • Matthew Bandyk
    • Monday April 20, 2009, 10:32 am EDT

    While the collapsing U.S. housing market may be at the root of the global economic recession, the downturn’s effects are being felt hardest overseas. Take Iceland, for instance. Its biggest banks failed, its economy may shrink 10 percent this year, its government fell, its central banker was sacked, the country was bailed out with a $2.1 billion IMF loan, and 7,000 people (in a country of 300,000) took to the streets in protest.

    Which countries have the greatest chances of being the next stories of failure? U.S.News looked at some countries that are currently facing severe economic disruption that endangers their standards of living, attractiveness to foreign investors, and political stability. First, we examined what Moody’s Investors Service and Standard & Poor’s had to say about them. These firms rate the risk of sovereign bonds, securities that finance the debt of a country. Many of the countries we identified have poor bond ratings or ratings under review for a downgrade, showing that these governments are perceived as being at greater risk of defaulting on their debt.

    Second, we looked at what global markets think about a country’s debt, based on data from Markit. The financial information company provides daily pricing on credit-default swaps, contracts between two parties that provide a kind of insurance on corporate and government debt. Analysis was also supplied by credit-rating organization AM Best. It ranks countries into five tiers based on the risk to insurers posed by the countries’ economic, political, and financial systems. Using these analyses, here are five countries in deep trouble and five worth keeping an eye on.

    [Find your Best Place to Retire.]

    Five Countries in Deep Trouble

    Mexico. Thousands of would-be tourists from America and elsewhere had to cancel spring break trips to Mexico due to ongoing violence related to the drug trade. Mexico was the second country recently identified by the U.S. Joint Forces Command as possibly poised for a “rapid and sudden” collapse. Mexico’s “politicians, police, and judicial infrastructure are all under sustained assault and pressure by criminal gangs and drug cartels,” says the report.

    The violence and tourism decline could not come at a worse time. Economists predict a 3.3 percent contraction of the Mexican economy this year. The poor economic growth means that the government is getting strapped for funds. In April, it asked the International Monetary Fund for a $47 billion loan. While credit-rating agencies don’t expect Mexico’s debt to grow riskier soon, and the risk of its sovereign derivatives has not skyrocketed like some other countries on this list, serious problems still remain for the Mexican economy. The country depends on the United States to consume its exports and pay Mexican immigrants who send money back home. If the U.S. recession deepens, Mexicans will feel the pain as much as Americans.

    Pakistan. The country has already almost gone bankrupt once in the past six months. In October, only an emergency $10 billion in support from the World Bank, the Asian Development Bank, and others prevented Pakistan from defaulting on its debt. During that crisis, the cost of insurance on Pakistan’s debt exploded. Even though the situation has calmed since then, investors are not getting comfortable with Pakistan. It still costs $2.2 million a year to insure $10 million of Pakistan’s sovereign bonds.

    The economic situation isn’t all bad. The Asia Development Bank recently predicted that Pakistan’s economy will grow 4 percent in the next fiscal year beginning in July, compared to 2.5 percent growth estimated this year. But the wild card that could change everything is the country’s political situation. Pakistan is one of the most unstable countries in the world. On April 13, White House counterterrorism consultant David Kilcullen said that a political collapse in Pakistan could come within months. A 2008 report from the U.S. Joint Forces Command identified Pakistan as a country at risk of a “rapid and sudden collapse,” one that would create a devastating security problem for the world. The report says that “the collapse of a state usually comes as a surprise.” Anyone banking their money on Pakistan’s economic growth might not know what hit them.

    Ukraine. While Iceland may have suffered the worst financial collapse of the global recession, Ukraine has also received a dubious honor: It had the priciest sovereign credit-default swaps for the first quarter of the year. It currently costs about $3.9 million to insure $10 million of Ukrainian five-year sovereign bonds. A year ago it cost just under $3,000. S&P rates them CCC–the seventh-best (out of eleven) rating, indicating that Ukraine is vulnerable to nonpayment.

    As the government tries to solve the crisis, Ukrainians are getting squeezed. Kiev, one of the oldest capitals in Europe, has had to shut down free clinics, schools, and increase public transportation costs in order to close a deficit. The Institute for Economic Research and Consulting is forecasting a GDP contraction of 12 percent. The Ukrainian stock market has fallen 25 percent so far this year. The Ukrainian currency, the hyrvnia, is also plummeting, falling 35 percent against the dollar in the last six months. The Ukrainian government’s efforts to shore up the currency, including setting a floor for which the hryvnia can be traded, have so far been in vain.

    Venezuela. Hugo Chavez has inextricably tied the Venezuelan economy to oil, and that didn’t look so bad before the financial crisis. Oil profits helped deliver massive economic growth, so much that 4.8 percent growth in 2008 was seen as a disappointment. But with oil prices having plunged due to the global slowdown, the fortunes for Chavez’s strategy have changed. Many economists are predicting negative growth for Venezuela this year, such as the 4 percent drop predicted by Morgan Stanley.

    From June to September, the cost for an investor to buy insurance against Venezuela’s debt almost doubled. Right now, to protect $10 million in Venezuelan sovereign bonds against default, an investor would need to spend $1.8 million each year. S&P gives Venezuela’s sovereign bonds a BB rating, meaning Venezuela faces “major ongoing uncertainties” that could lead to “inadequate capacity” to meet its obligations. S&P also has a negative outlook for the bond rating, meaning it could decline in the next six months to two years.

    Argentina. The Argentine economy is notorious for its boom and busts. The country last defaulted on its debt in 2002, but enjoyed economic improvements through most of this decade. During that last financial crisis, citizens staged protests known as cacerolazos, which means “banging of pots and pans,” but the demonstrations resulted in broken windows and fires. Argentina has not seen that kind of violence stemming from the current financial crisis yet, but foreign investors are worried the economy is back to “bust” mode. CMS Datavision ranks Argentina as having the third most expensive credit derivatives in the world. Right now, Markit composite prices show an annual cost of $3.2 million for an investor to buy protection against $10 million of Argentina’s sovereign debt. Moody’s rates Argentina’s sovereign bonds as B3, meaning a high, speculative credit risk, and S&P as B-, meaning that more bad economic news for Argentina could lead to default. The Organization for Economic Cooperation and Development gives Argentina a seven, its riskiest classification rating.

    Five Countries to Keep An Eye On

    Latvia. Iceland isn’t the only country that’s seen massive protests against economic hardship. In January, a 10,000-strong demonstration in Latvia’s capital, Riga, turned into a riot. Tremendous economic growth since the end of the Cold War earned Latvia its place as one of the “Baltic Tigers.” GDP growth was 11.2 percent in 2006, for instance. But Latvia’s Ministry of Finance forecasts a 14.9 percent drop in GDP this year. Latvia is getting a $7.5 billion emergency loan from the IMF, but the organization is sitting on part of the money because of the Latvian government’s failures thus far to reform its budget. The past two years have seen the cost of Latvia’s credit default swaps increase over one-hundred fold. Moody’s rates Latvia’s bonds as Baa1, or “moderate” credit risks, and projects that they could become riskier bets in the medium term.

    Croatia. The country’s beaches on the Adriatic Sea draw so many visitors that tourism is almost 20 percent of the country’s GDP. But since the recession is taking a bite out of travelers’ pocketbooks, Croatia’s economy is getting bitten as well. The government forecasts unemployment could rise as high as 12 percent this year. And a recent poll found that 78 percent of Croatians think the country is going in a bad direction, with unemployment cited as the primary reason. All this bad economic news might be one of the reasons S&P projects a possible rating decline for Croatia’s BBB-rated bonds. The BBB rating means that Croatia does not have payment problems yet, but are in a position where their ability to pay for debt could be easily weakened.

    Kazakhstan. While the Central Asian nation’s GDP has grown in recent years, Kazakhstan has two problems that have created the potential for economic disaster: a reliance on foreign lending and a reliance on oil. Kazakhstan holds 3.2 percent of world’s oil reserves. But the soaring oil prices that have boosted Kazakhstan’s economy are no more, and investors have pulled money out of Kazakhstan in response. The cost of buying protection against Kazakhstan’s debt has skyrocketed about 75 percent during the past year. The cost is back up to a peak reached in October, and it currently costs $875,000 a year to insure $10 million of Kazakhstan’s debt. S&P has a negative outlook on Kazakhstan’s BBB-rated sovereign bonds, meaning they could get riskier in the next six months to two years.

    Vietnam. Unlike many of the other countries on this list, Vietnam has had some good news recently. The Asian Development Bank forecasted Vietnam’s economic growth at 4.5 percent for the next year, the highest in Southeast Asia. Yet the country just registered its slowest economic growth in a decade. A survey found that 46 percent of Vietnamese were afraid of unemployment in January, up from 9 percent in September. Both Moody’s and S&P have a negative outlook for Vietnam’s sovereign bonds. The price of its sovereign derivatives has almost doubled in the past year. Vietnam falls into the riskiest of the five tiers as rated by AM Best. In particular, the firm identifies Vietnam’s financial system, plagued by “relatively poor infrastructure and cumbersome bureaucracy,” as “very high” risk.

    Belarus. Minsk, the capital of Belarus, was mostly destroyed during World War II and much of the city was rebuilt in the form of hulking, utilitarian, Soviet-style buildings. Belarus also retains a heavy Soviet influence in its financial system–all but one of the country’s 31 banks is controlled by the state, according to AM Best. Because of Belarus’s failure to reform its financial system, the firm gives the country its highest score for financial risk. Even though Belarus scores relatively well for political stability, that economic rating is enough to push it into the riskiest of the report’s classifications.

    Belarus’s problems aren’t just speculative. Although its economy is still growing, the IMF expects it will expand 1.4 percent this year, compared to 10 percent last year.The country’s government has also been approved for a $2.46 billion IMF loan. But the IMF now forecasts that the country will need a further $10.7 billion in 2009. Still, other experts disagree about just how fragile Belarus’s economy is. Its bonds are rated as B1 from Moody’s, meaning high credit risk but also at the top of the pack of the high-risk countries.

    [See America’s Best Places to Retire.]

  • Time to renew Economic and Social Council

    Time to renew Economic and Social Council

    April 17, 2009 TDN Editorial


    Opinion


    A spate of dire economic reports has been emerging in recent weeks: plummeting industrial production, collapsing exports, shrinking capacity usage. All are worrisome. But none is as dire as the latest news that unemployment is at a record high, probably the highest in the history of the Republic.

    At the start of the year, new figures reveal, unemployment stood at 15.5 percent. That means today, in the estimate of economist Seyfettin Gürsel, the real figure is probably above 17 percent.

    That means roughly 4 million people in Turkey, a population nearing the size of Denmark, are idle. For young people between the ages of 15 to 25, the jobless rate is now officially 27.9 percent. To put this in international context, only one significant economy in the world today has a worse unemployment picture. This is South Africa, where the figure is 23.2 percent. In Gürsel’s words: “this is catastrophic.”

    It may be too early to pronounce catastrophe. But the social implications of unemployment at these levels are all too familiar. Yes, as we have reported this week, some of this can be absorbed by people returning to complete education. As we report today, young men opting for conscription as officers rather than privates, with the attendant long terms and salaries, is also a rising trend that can help at the margins. But this is not a problem to be solved at the margins. Resort to extremist ideologies, whether based on religious or nationalist ideologies, is one danger. As Chief of General Staff İlker Başbuğ noted in his widely reported address this week, it is the young and the jobless who are most vulnerable and at risk of seeing hope in extremist violence.

    Some of what should occur is obvious: Turkey needs to reach accord with the International Monetary Fund on an accord to underpin the country’s public finances. The country needs a real fiscal stimulus strategy, one aimed at the real economy. Reductions in certain consumer taxes are fine. Tax policies offer further room for creativity, even temporary aid to reduce the cost of creating and maintaining employment Ğ social insurance costs for example Ğ should be on the table. Interest rate policies that serve production are helpful, but worldwide, the limits to monetary policy are reaching the end of effectiveness. And in Turkey, nothing used so far adds up to real stimulus.

    In the face of these growing unemployment figures, one important step would be to dust off the “Economic and Social Council” idea born of the 2001 crisis. Now moribund, this notion was a national advisory body drawing on government, labor union, education and civil society resources to advise on sensible, practical and doable steps. No stone of potential policy should be left unturned. The alternative is that foreseen by Gürsel: catastrophe.