A Country-Wise Debt Analysis

The recession in 1990 lasted from July 1990 to March 1991. The OECD countries suffered recession in 1990. Among the 18 OECD members 17 had to go through the bitterness of recession. Italy, Greece, France, Ireland, Japan, Korea, Portugal were among those countries. The recession lasted for two years, but it paved way for most of the economical issues which all those countries face today.

This chart represents debt status in those countries impacted by the recession from the 1990 recession till 2012.

     Click on chart for bigger image

The Employment Worries

As the economic slowdown advances 4 million youths joined the bandwagon of unemployed in the global front, which originally was 193 million at the beginning of 2012 keeping the developed economies as the epicenter of the crisis. The 25% of the unemployed youths is from developing countries whereas; East Asian, South Asian and Sub Saharan African youth constitute 75% of the unemployed regime. 

The recent ILO report on Global Employment Trends 2013, 39 million people have abandoned the labor market because of the job prospect unavailability, since 2007 which resulted in a 67 million job gaps till date. Experts look for a moderate output growth in 2013-2014 and this growth will not show in the labor market index, which will witness a rise of 5.1 million in 2013 and an extra 3 million in 2014, which will make the 202 million unemployed in 2013 to 205 million in 2014.

Major EU countries are focusing on civil service job cuts in a huge amount. Bulgaria (5.5% of between 2008 and 2012), Cyprus (5000), France (replacement freezing scheme directly affecting 30,400 civil employees), Greece (reduction target up to 20% in 2015), Ireland (reduction of 24,750 staff), Romania (replacement for 1 staff for 7 leaving), UK (nearly 40, 0000 jobs cut by 2014).

The developed economies and the EU will have the most number of unemployed people with 9.2% of unemployment in 2013, and 9.5% in 2014. The number of workers living in extreme poverty has reduced throughout the global crisis with the number of people living in moderate poverty declining in this time frame. This is a phenomenal change!

The Asian economies are also on the same track.  Throughout 2012 the East Asian labor market remained indolent. Employment in the East Asia expanded only by a 0.5%! The reports say that East Asia witnessed a 21.8% growth in unemployment from 2007 to 2012.

The unemployment rates were higher among men rather than in women. In East Asia rate of unemployed youth increased up to 0.3% in 2012 from 2011. South East Asia and Asia pacific together witnessed an increase in unemployment from 4.6% to 5.2% in 2012. In Asian countries there are women who don’t take up a job because of the cultural and traditional reasons.

Long term unemployment has increased due to the economic slowdown which is 31.3% in the US and 39.4% in Japan. Prior to the crisis rate of long-term unemployment was 28.5% it increased to a 33.6% exclusively in developed countries and EU. Long term unemployment affects the skill sets and competency of the job seeker which will result in difficulty in finding a new job.

There is a global slowdown in Labor Force Participation in which European Union faces a dip close by 1% point which will recede further. People will drift away from the labor market due to the long-term unemployment and weak economic growth. In consequence of that, the employment to population rate has already stopped down to 4% in a few countries with the job creation rates being lower than ever.

The working population also has their own share of worries. The number of working people in extreme poverty all around the world is 397 million, added to that is  472 million workers struggling to meet their basic needs!

Do Austerity Measures Really Work ?

A 23% increase in the sales tax and wage cut up to 15%! This is in Ireland!  When the government sees no other method to hold the country stable then they adopt austerity measures, or it can be said that austerity measure adoption shows that the government has failed with its administration and strategies.

Ireland has gone through 5 austerity budgets since 2008 to slash the spending and to increase the taxes and the experts say that this will go till 2015. Ireland has cut down the number of civil servant vacancies, high taxes are imposed on income, automobiles, fuel and homes, and  the unemployment rate is 15%.

Austerity measures were introduced in Greece in 2010 as a precondition for IMF-EU 110bn euro bailout. A second bailout package of 130 bn euros was given in 2012. 2010-2012 Greek riots against austerity measures resulted in the death of 5 people. The spending cuts were equal to 1.5% of the output, but the austerity measures have not resulted in the goal which they were adopted for and the main reason is the instability of the ruling party.

In 2011, an amount of 78 bn euros was bailed out to Portugal by IMF and other European countries, same year austerity measures were passed in the country. The austerity measures include a 5% pay cut to the top earners from the public sector, a 1% rise in the VAT and an income cut for high earners. 14.8% unemployment is reported in 2012 and military budget is also being slashed

The Spanish Government took a historical movement of cutting 27bn euros from the state budget in 2012.The first ever austerity budget was passed in 2011, to meet the deficit target of 5.3% of the GDP, the measures adopted are 5% cut in civil servants pay, 28% hike in tobacco taxes, 30% cut in infrastructure taxes, a freeze in public worker salaries and 16.9% reduction in departmental budgets.

The UK adopted austerity measures in 2011 by the Conservative-Liberal Democrat coalition government. The number of job cuts will come up to 490,000, 19% budget cuts for all Whitehall departments and the retirement age will rise to 66 from 65 by 2020. The budget deficit is 10 % of the GDP and unemployment is around 8.4% that is 2.67mm.

A 5 % cut in the top rate of tax is mentioned in the 2012 budget. Personal income tax allowance which the pensioners receive and the child benefits were reduced. Whereas tobacco taxes was increased.

The real question is whether the austerity measure can improve the country’s economy. According to the GDP equation, GDP = C+I+G+(X-M), austerity measures will help in reducing the G, which is Government spending.

When G is Government spending, C stands for private consumption, I for Gross Investment, X and Y are Exports and Imports respectively.

Austerity measures will reduce the G, which in turn will reduce I. Government spending and not making revenue are the reasons for government debt. Ever since the recession, Greece's economy has come  down more and more, despite implementing further austerity measures., The  economy contracted by 2.3% in 2009, 3.5% in 2010, 6.9% in 2011, and 6.0% in 2012. Spain also with its austerity measures got a 7% decrease in government spending; they have 24% of unemployment rate with the GDP coming down to 5.1% .

The impacts of austerity are long term and are detrimental to social and economic situations. By applying these measures, the EU is just targeting on short-term fiscal deficits and debt to GDP ratio. Austerity measures are nothing but transferring crisis from one period to another.

Student Loan Crisis in The US

The US student loan crisis is truly  alarming and is a much debated issue in the country. One in 3 borrowers owe more than an amount of $25,000. This year will witness the total student loan exceeding $ 100 billion Banks are tightening the criteria to get a student loan as the repayment rate goes down. In the US, U.S. Bancorp USB is pulling back from the student loan services while JP Morgan Chase has reduced the lending rates.

Around  20 million Americans attend college every year and 60% among that borrow to cover the costs and 37 million students  among them are with outstanding student loans.  According to a report in 2012, the average amount of student debt outstanding was $26,600. Over the past 4 years student debt has risen by $327 billion, at an increasing rate of 51.2%. Other forms of debt including housing loan, auto loans, and credit card loans form only $ 1.7 billion.

Studies conducted by The Federal Bank of New York shows $1 trillion of outstanding student in 2012.In that $85 billion is  due. Around 85% of student loan is backed by the US Government. Experts foresee student loan market getting closer to what happened in the mortgage markets five to six years ago.

The phenomena of job loss have affected the repayment which reduced the ROI in education. Job cuts and frequent lay offs contribute to the non repayment. Between 2004 and 2012 the rate of  student loan increased to a 14% per year. Two- third of the borrowers is under forty, one-third of them under twenty and thirty. Older people also have a share but it’s comparatively very small.

Two million US citizens who are over 60 has unpaid student debt. Total federal student loans are $864 billion and private student loan will come up to $150 billion. The borrowers generally don’t understand the risk of the repayment while they take the loan. For eeach student loan defaulter, two or more borrower becomes delinquent with default. 41% of borrowers become delinquent in the first five years of the repayment

Most of the borrowers are not getting any proper counseling prior to the loan. 65% of them are not aware about the loan process. They misunderstand the repayment terms, interest rates and the monthly payments.
Consumer Financial Protection Bureau (CFPB) decided in the month of February that they will help the policy makers to make terms and conditions which make the repayment easier.

Journey of a powerful Asia

The US, Japan and EU together form 57% of the global economy while, they have only 14% of the world’s population, where China, India and Indonesia has 40% of the world’s population with 12% of global GDP. The youthful population and its literacy rate are the main factors which influence the economy.

The power shown by Asia in overcoming recession has actually shocked the world, when the rest of the world still faces economic crisis. The Asian industry will grow in the energy, agribusiness, food retailing, environment business, automobiles, and housing sectors.

The Asian food demand will double, and it may reach US$3 trillion by 2020. The food consumption by 2020 will grow nearly 80% as much as the US, up from 45% at present. This increased rate of consumption will lead to increased business opportunities in food retailing specifically groceries.

Compared to 2008, the present GDP has grown by 18% in Singapore and Malaysia, 14% in Philippines, 10% in Hong Kong, Taiwan, Korea and Thailand, 29% in China and 25% in India. Amazingly GDP of US has not grown to the pre crisis level.

GDP of Asia will be 80% of the current GDP level of the US by 2020. By 2020 China will grow by 64%, India 17% and 6% growth will be from Indonesia. In 2020, these three countries will be the prominent players and they will contribute to the 87% of growth in Asia. By 2016 Asia’s GDP will match that of which will be US$17 trillion. By 2020 Asia will grow 17% more than the US.

Healthcare, Housing, Energy and Food, which are the pillars of consumerism, will grow more. Population will increase to 290 million people in major cities, including Shanghai, Mumbai, Jakarta and Bangkok

Average income of Singapore and Hong Kong was a quarter than that of the US. Today it is equal to the US and by 2020 and it is expected to be 25% than in the US.

So is it time for Asia  gain the control of the globe ?

Will Gold Glitter again?

The volatility in the gold price has brought so much ambiguity and it is so much debated than any other issue these days. The yellow metal which is considered as a great asset and the first love of any investor has put a question mark on its credibility due to the price instability.

The EU crisis could well be the reason for the massive swing in gold prices along with austerity measures taken up by EU governments. Most of the EU countries apart from Germany which adopted austerity measures haven’t had success till date.

Borrowing has hit the highest levels in many EU countries, even though the fiscal measures put forwarded by the creditors were so strict. Germany, the only EU country which is not affected by recession which is in debt with only 0.3 GDP during the last quarter, doesn’t want to be a savior for the rest of EU.

Speaking at an event hosted by Deutsche Bank in Berlin, German Chancellor Angela Merkel requested EU countries to prepare to cede control over certain policy domains to EU institutions, if they want to fight debt crisis. She added that Germany can’t take up the cross and they are not planning to give more credit to other EU countries.

This has created much tension between EU. Germany is very careful about their economic planning does not want to get into any plan where the country has to pay for that.

The rest of the EU countries are forced to dispose their gold reserve to pay off their debt and this may lead to further decline in the gold price .The month of April witnessed so much volatility in the gold price due to the assumption about Cyprus offloading their gold reserve. In this anticipation gold price came down to $1500 an ounce for the first time since July 2011

EU finance ministers met in Dublin, decided that the financial aid to Cyprus will never go beyond € 10bn.

Gold prices have irrationally inflated during the last two years and the decline in the price can be counted as a correction. It is likely to find support around $ 1185-1225.

Another interesting fact is that the US economy is improving with interest rates still at a lower rate with a buoyant stock market at both USA & Japan and Euro Zone still struggling.