05/08/2011 Newsnight


In-depth news investigation and analysis, with Stephanie Flanders. Newsnight examines the state of the global economy amidst instability on the stock markets.

Similar Content

Browse content similar to 05/08/2011. Check below for episodes and series from the same categories and more!



Good evening and welcome to Good evening and welcome to


Newsnight, also being broadcast tonight on BBC world News. Five days


ago global investors were pondering the possibility that the US


government might default on its debt. Then they were told they could


relax but instead they started to worry about the American recovery


grinding to a halt and European governments hitting a brick wall


their efforts to fix the single currency. Tonight, after the


week for the Dow in more than two years, an US broadcaster is


reporting that the key ratings agency, Standard & Poor's, is about


to stop giving American government debt a Triple A rating.


the end of another hair-raising day, here is Andrew Verity to explain how


we all landed up in so much trouble again.


There's no time like August for an There's no time like August for an


There's no time like August for an international financial crisis. Two


international financial crisis. Two international financial crisis. Two


There's no time like weeks ago, markets across the


had enough confidence in Europe's institutions to be convinced by


leaders' assurances that they could deal and were dealing with the


crisis in sovereign debt. This was the week that that confidence


collapsed. Now it's as if Europe's leaders are giving up trying


reassure the markets; instead, have taken to attacking them. The


market unrest witnessed in the last few days is simply not justified


the grounds of economic fundamentals. Such dramatic changes


in the markets are from of view incomprehensible. On this,


the busiest trading day of the year, shares in London dropped again by


2.7%. Over the week the top companies have lost more than 10% of


their value, around �150 billion, with similar drops across Asia and


Europe. It has been the worst since the banking crisis. 2008,


almost exactly four years credit crunch which caused that.


What happened in the credit crunch of 2007 was that the banks became


reluctant to lend money to each other. It was as if all of the


here at Canary Wharf were looking each other, thinking:


how many billions of pounds you have lost on these bad assets, I don't


know even how many billions of pounds I've lost so I'm not sure I


want to lend to you when I know if I will get it back.


lend but only if you pay a fat rate of interest to compensate me for my


risk. The question now is: same phenomenon happening again?


What caused it back then was concern over the value of billions of


dollars of assets. The same concern; different assets. Those who have


lent money to eurozone countries by buying their government's bonds are


worried they won't get all their money back. Here is how worried. If


you bought a bond from the Spanish government the markets reckon


will get back only 96%. .


With that much uncertainty, there With that much uncertainty, there


isn't a credit crunch now, but there may be soon. Well, at the moment the


fundamental case is that a lot of European economies in common with


the UK and US borrow from overseas investors. At the moment, overseas


investors haven't got confidence in our domestic economy so they are


more likely to wait before putting more money in, and that's what


causes the shortage of funding which manifests itself as a credit crunch.


These foreign investors need austerity measures, a degree of


political consensus, and that will give them confidence


safe to lend to these again. The way the credit crunch


resolved four years ago was nanny came to the rescue in the


shape of the state. It was governments and Central Banks that


told the other banks: if you bad assets that no one else wants it


buy, we will buy them from you. They told them: if you can't get funds


from other banks, we to you. The question now is: who is


willing to play the role of nanny? Not Angela Merkel, who has been


very aware of just how far German voters aren't willing to go to


out member states who lack fiscal discipline. Today she spoke


telephone to Nicolas Sarkozy. They have to come up with


what? The first thing that needs be done is that the European Central


Bank should start buying Italian and Spanish bonds on the


secondary market and therefore bringing the yields down. It


to do that pretty quickly. yields have gone up significantly


and that means for that the debt - not all the debt -


portion of the debt, that has become very expensive. We are not


suggesting it will be hugely expensive for the whole lot, but


they need to calm markets nevertheless so that when countries


go back to the markets again they can borrow at lower rates. Claiming


Italy is under attack from speculators, Italian Prime Minister


Silvio Berlusconi has called an emergency meeting of G7 finance


ministers to take place within a few days. They must act or they will


have a hectic holiday season. I think there needs to be a political


consensus across Europe and that is nigh on impossible to


the moment. I think therefore we have to wait until the crisis


possibly looks worse and this game of brinkmanship comes to a head


whereby European politicians realise there is no alternative but to all


get together and act multilaterally. The banking system didn't stabilise


itself in 2009 until global governments made it clear they


defend the system no matter what. Now it's up to politicians to defend


The markets are telling Europe's top The markets are telling Europe's top


bankers and politicians that they are unconvinced by their assurances.


They don't really believe them. But perhaps Europe's leaders can agree


with the markets on one thing: they are not giving eurozone countries,


institutions nor leaders much credit.


Andrew Verity there. Anyone working Andrew Verity there. Anyone working


Andrew Verity there. Anyone working in the financial markets will


in the financial markets will in the financial markets will


Andrew Verity there. probably just be glad that the


weekend is final here. A huge of red ink has hit dealers' screens


over the last two days and they had another seesaw ride. We


asked three correspondents in key global financial centres to tell us


what it has been like for them. First Lucy William


First Lucy Williamson in Here in South Korea the sun has set


on a very dark day for the markets. The index fell 3.7% today, the


biggest in a series of losses over the past four days. It's now facing


its steepest decline in almost three years. Government officials held


emergency meeting today up to road - up the road here and are


insisting there's no reason to panic. Korea's economy is being


shaken but uncertainties in America and Europe but 70% of its trading


partners are emerging countries. There's not much comfort elsewhere


in Asia. The Nikkei fell 3.7%, Hang Seng in Hong Kong by more than


The main stock market index here in The main stock market index here in


Germany the Dax fell by 13% over the whole week. The main index in France


fell by 11%. In Italy it was 12%. It's all part of a relentless slide,


as stock markets start to realise that that deal apparently done less


than a month ago to stabilise the euro may not now be the last word on


the matter. At the Stock Exchange here you get the feeling activity


goes on. Angela Merkel is apparently relaxing in the Alps but there's no


doubt that that is short-lived. has been engaged in conference calls


with other leaders of eurozone countries. Her big constraint


public opinion here in Germany. The opinion polls indicate that people


by and large want the euro. There is no great yearning to go back to the


Deutschemark. But the polls also say that they are absolutely split down


the middle on whether to pay more of their money, taxpayers' money, to


keep that euro in its current form. .


Here in New York, it has been one of Here in New York, it has been one of


the more dramatic weeks for the the more dramatic weeks for the


Here in New York, it has stock markets. On Thursday, the Dow


Jones industrial suffered its worst one-day loss since 2008 falling 4%.


The Standard & Poor's index didn't do much better. So what's behind


this sea of red? Well, the is that the US economy is


back into recession, and here is why. The week started with a debt


deal that cut US government spending, putting the US on


austerity path just when recovery appears to be faltering.


Manufacturing and consumer spending data was also weaker than expected


and today's jobs report simply offered only a tiny amount of


relief, just showing that employment picture wasn't actually


getting worse. .


Well, all day we have been hearing Well, all day we have been hearing


the comparisons with the dark days of autumn 2008, the credit crunch


and the great banking crisis. say the parallels over the top, the


banks for starters, are different; others say it's worse. With


Baroness Vadera who had a ringside seat on the last crisis, working


with Gordon Brown in the Treasury. You played a big part in writing


that bank bail-out plan time many people credited with


turning the situation around and taking the markets out of the sort


of death spiral that they were in then. Does this feel similar to you,


the last few days? I think it has similar feel. It feels as scary


it is different and I am in the camp where I think it's


potentially worse. The reason potentially worse is the governments


stepped in all over the world saved the banking system in order to


save their economies and now who is going to step in to save


governments? Secondly, when we went into that crisis interest rates


quite high so we did have policy to use as a tool and now we


are at the outer limits of that. Lastly, we are currently facing


quite a lot of inflationary pressures, particularly coming from


commodities and emerging markets, so we've actually got a little bit of


pressure on the other side, so our room for manoeuvre is a lot more


limited. As someone who has been an insider for so long on


of crises and you played a big part in the G20 meetings as well, if you


were in the French Treasury tonight or if you were sitting at the ECB,


what are the calls that are being made? What are they going to be


thinking about over the next days? I think that the problem


they have currently is they don't have a functional system for making


decisions. They don't have institutional mechanism for making


decisions in the way they need to be made. The crisis in the last few


years has taught government some lessons. You have to act really


fast. You actually probably have to act without the market expecting


to. You have to overshoot market expectations. You have to be


comprehensive and see off all of the avenues of attack and most of


you have to communicate fighting with each other and so far


the eurozone has not managed to single one of those things. So I


think what they will be doing now is talking about liquidity for


Italy and for Spain, and the only source of liquidity - Liquidity,


giving them cash in some way or another? Giving them cash,


not the same thing as risking putting in a huge amount of risk,


the numbers are large, and the only source of ready cash is the ECB.


Because they haven't really pre-committed to the EFSF, so this


is the only source of funding and the ECB of course has a duty to


financial stability, so has a duty to act, but they will be very


reluctant to do so without reforms. But a lot of people


has been a talk in the last weeks and months, people


European leaders are kicking the down the road, even US governments


maybe have been putting off difficult decisions, but isn't there


an argument that says you guys put off all the difficult decisions


well? You were faced with a crisis, a lot of debt sitting on


balance sheets, ultimately a lot of the problematic debt in the bank


sector didn't get written off as maybe it should have done, it got


shifted on to the balance sheets governments and now we are dealing


with the second leg of a crisis that you sort of left us with? Actually


it's not true because the response at the time stopped essentially


position that would have been a lot, lot worse. We would have been in a


much worse position today if we hadn't done what we did all over the


world. We would have been in depression and deflation. We did not


assume the debts of the banking system. But a lot of these debts,


if they were not going to be repaid, why were they not written off


That is what people ask now. Yes, would have been difficult but aren't


we just now dealing with that has been passed along for


several years? I think that what did in the response in 2008 was to


stop that debt spite, but it was always going to take - always


to take a long period of time to deal with the overleveraging of


whole system, whether in banks, governments or in households and it


was always going to take a long time to deal with the level of toxic


assets. We didn't assume - for example Ireland - we did not


assume the debts of the sector. Briefly, you don't think


you should have been tougher and gone further in dealing with the


fundamental problem which is debt? I don't think it was


at that time without actually tipping us over the edge


gone further, but it was always going to be - some of these problems


now are self-inflicted. The cost of dealing with them has increased


because of the delays in dealing with them and that is the real


problem of the eurozone crisis and in of course the US has also been


self-inflicted. Baroness Vadera, thank you very much. Thank you. As


we have been discussing there are deep economic problems lying beneath


all of the yearses in the markets because - gyrations in the markets.


But most worrying for some has been the politicians' inability to


confront those issues. There is one big difference between now and


Back then, the worries centred on the banks. Today they are in the


frame, but the focus is on the paralysis of politicians on both


sides of the Atlantic, whether it's American budget policy or the


troubles of the eurozone, governments just don't


able to confront the problems they face, but perhaps we shouldn't


that so surprising. I think policy paralysis is actually a really big


difficulty because politicians have to assume, have to be optimistic


about the future. They assume that growth will somehow rebound. That's


the experience we've had for the last 40 or 50 years. When things go


wrong, they correct pretty quickly. This is really the


first time when we've seen things going badly wrong and they haven't


corrected particularly quickly. The consequence of that is that it


forces politicians to have to consider and contemplate really,


really tough decisions. Some say the problems go even deeper, that


integrated global markets and national democracies just don't mix.


To come together to fix global problems, countries need to


some national sovereignty and that's not something that democratic states


find easy to do. You see this in trouble the G20 leaders have had


resolving imbalances in the economy and you surely see it in


acute form in the struggles of eurozone. We have a policy crisis


worldwide. Policy is deliver vision. We want to see,


can America, how can euroland along with a perspective? How


able to get the economic the table? Now we are not ready and


not able obviously on a basis to solve these problems. The


moment of truth in financial crises comes not when governments run


of options but when they come out of politically possible ones, like when


Norman Lamont raised interest rates to 15% to defend Britain's place


the ERM in the middle of a recession. That was when the


knew the game was up. After the events of the past few weeks,


Europe's politicians must battle now to convince the doubters that they


haven't exhausted the realms of the politically possible.


With me now, Holger Schmeiding, With me now, Holger Schmeiding,


chief economist at Berenberg Bank in London; David Riley,


rating agency Fitch Fitch; the economist and author, Noreena Hertz,


and fund manager Joanna Kryklund from Schroders. David Riley, can


start with you, to pick up on something in my piece there,


a sense that there's now with the euro. If they are going


to hold it together, they have to take a big step towards fiscal union


and yet it doesn't seem like anyone in Germany or in a lot of


places is ready for that to Is that the basic fact that we are


facing? That seems to be really what the market has been now


concluding and demanding, which is either we have effectively a United


States of Europe or the not viable and the euro will


disappear, certainly in its form. I think what's


that increasingly the market is pushing policy makers and Germany


particular closer to the position where it's going to have to


some of the policies which it has not wanted to do, which will take it


closer to fiscal union, example I suspect they will start


dusting off plans for a common euro bond, which will issue for


everybody, will be joint and severally guaranteed. If


increase the size of the fangs stability facility,


essentially the rescue fund that, could ultimately become a sort of


debt management agency if you like for Europe, so I think they are


being pushed towards fiscal union but kicking and screaming


way. Holger Schmeiding, two weeks ago the


ago the Germans were not ready even for that kind of bond, does it just


take every few weeks another market crisis to push Germany down


road? There is something to that, yes. It takes one crisis sort of


after the other to push the Germans towards that, but the Germans will


always exact a price. What the Germans will always be asking for


each stage is, if we the Germans have to issue stronger guarantees


than you our partners, please subject yourselves to stronger


fiscal surveillance. So it's a mutual process. If Italy is ready to


put a balanced budget amendment into its constitution then the Germans


are ready to grant more. So it's a mutual process of the two


coming together. OK, but Noreena, we are talking about - when you talk


about surveillance, you are talking about Germany getting more and more


- in return for the money, Germany getting more and more control


other countries' policies. Mmm. you think that can happen? Do you


think that's something democratic that could happen? I think it's


very worrying and I think in Germany in particular Angela Merkel


having to walk a very tight line between what Europe needs and what


her domestic electorate are wanting. We've got to remember that she had


bad election in the federal elections, the CDU, and so for her


to sell to the German people this plan and Germany bailing out


essentially the rest of Europe is going to be problematic. Then,


imposing in return austerity programmes potentially on countries


that are barely coping is to be good for Europe. It's not


going to be good for any of us. But that's a good point, do you think


that countries are getting forced into policies that actually could be


counterproductive for growth, for their economy, or as far as you are


concerned you are managing billions of dollars worth of assets, you can


never have too much fiscal austerity? How does it work? Well,


no, unfortunately we do need the politicians to get ahead of the


curve, to some extent they have to shock and awe the markets. What if


they can't? The problem is the last few weeks we seem to be seeing


they can't. What they will continue doing, I think, is


buying themselves time so in short term the markets are going to


have to keep on focusing on sort of news flow and the


that we are not going to get sustained rise in equity prices


while this situation is ongoing, and that's particularly while economic


growth globally is weak. So I really for markets to enter


sustained uptrend we need to the one hand a credible solution out of


Europe. I think that will long time. On the other hand,


something that maybe will come sooner is some kind of improvement


in economic statistics which we not seeing at the moment. I am


interested to ask you, it has mildly nauseating the last few days


the way the Chancellor has sort of crowed here about how we


haven and no one is worried about our commitment to cutting the


deficit. I assume that you are piling into the UK in a big


way with your fund? I wouldn't say that, but I think that certainly the


UK has one major advantage relative to the eurozone and that


to weaken their currency relative to some of the member states within the


eurozone and I think that has huge advantage. I think that comes


back to the point that you were asking me about earlier which is


from the perspective of an is there any such thing as too


austerity? Well, actually there is. Ultimately we want to see growth,


especially if investing in the equity markets and the fact that


there's this fundamental rigidity the eurozone and the countries


are struggling can't devalue currencies, which is the way the


Asian economies for example got of their crises, is a concern. So


it's a careful line we are treading. On the one hand we want European


policy makers to show they of the curve but at the same time we


don't want measure measures that are too extreme because ultimately that


means a lost decade for growth in Europe. Exactly, like the problem


in Japan in 1996/97 when they did try and balance the budget far too


quickly and ended up with this decade which we are now potentially


facing in Europe. But there was political paralysis at the heart of


that as well. That is why it's an example of what I was talking


in the film, that the politicians were - but do we have the


capability, capacity and leadership here in Europe to move


out of a out of a state of paralysis? I'm not


sure. There's a big difference to that, namely when we look at what is


happening in Europe, look through the turmoil, we are actually


a wave of structural reforms. We are seeing the labour market reforms,


that is Europe beneath the surface, but Neath the noise is actually


delivering all the the end will make the place better,


which is if Europe manages to buy time, after that time is over,


Continental Europe will be in a much better shape than it is today. But


structural reforms, another way of putting it - And in that process, we


are going to have millions more people unemployed, we are going to


have consumer confidence David Riley, the point is, that is


a worry, isn't it, say we assume that there's just going to be slow


movements, Germany with a gun to its head, moving closer and closer to a


fiscal union; doesn't that, the best of all worlds, doesn't it


condemn large parts of Europe to very slow growth for years? It does


potentially, but I actually don't think that's going to be a viable


strategy. I think what actually needs to happen, the markets are not


going to wait for structural reforms to transform Italy into a dynamic


economy. Essentially, there was a real risk now of a self-fulfilling


not just a self-fulfilling liquidity crisis but a self-fulfilling


solvency crisis. Italy and Spain are solvent but if the market is saying


we are only willing to lend at 7 or 8% over the medium term then


will become insolvent so the ECB must intervene. But can the


European Central Bank be a stop-gap in this? It hasn't got any -


would say that was a fundamentally political act and it is


independent institution; it's not supposed to be just doing the job of


governments. The European Bank can do exactly what the Bank of


England does, what the Yes. The European Central Bank is


an extremely powerful institution. If they step up to the plate, which


they reluctantly will likely do, they can defuse the crisis and if we


again make these comparisons, always remember the eurozone has as a unit


a fiscal deficit much smaller than that of the US and the UK which


means if they want to they can get things under control. They just


to be pushed to do it. Actually, we haven't very much longer and


obviously this news about the US is quite important tonight, and I


we have been talking about of politicians and we started


week looking at rather paralysed American politicians. David,


should get your reaction to the about Standard & Poor and them


taking away the US Triple A rating. Yes, I think


Poor's signalled their intent to downgrade the US. I don't think it


will come as a surprise. Are we going to see a real market reaction


to that on Monday? Is this the end of the world? Yonks, no. I suspect


not. I think at the moment they care more about that than downgrades. I


think at the moment we need stabilisation in the economic data


because if growth improves that helps put some of the sovereign debt


concerns on the backburner. With respect to the potential


of the United States, the it is still one of the most highly


rated economies so it won't a sell-off in US bonds necessarily.


It might provoke a sell-off in lower rated bonds as people shuffle their


portfolios. So basically the US stays top dog and everybody else


loses their Triple A as well? don't know about that but it is


still favourable for the US Treasury at the moment despite the downgrade.


Do you see some of the same kind of paralysis in the US? Do you think we


are being too kind to American politicians? I think we


politicians? I think we actually are seeing worse paralysis in the


US. In the eurozone we experience over the last 18 months.


I disagree with that. There's a crisis, they always react and in the


end they manage to defuse the crisis. In the you had we have this


stupid situation, they cannot agree to borrow for a while so the


eurozone has problems but it's not that dysfunctional, it just is


rather noisy. You are saying noisy. I don't think anyone looking at the


eurozone in the last few weeks recognise your description of them


fixing the problem. No, not here, but once they react to problems


now they have one and we will see on Monday how they react. I think


that's a particularly toxic cocktail right now. On the one


the US, very flat growth, flatlining, we have unemployment


high there, yes the unemployment figures were a little better but


still high, and this potential downgrade, and on the other


have Europe with the eurozone now widening the crisis to Spain and


Italy. One on its own would have been worrying. Two together, can the


world cope? I'm not sure. I think double dip ahead. Is the answer,


you are an investor, just to get of America and the US? Go to


emerging markets? Certainly island avoid Europe for the time being,


yes, but in the meantime I there are opportunities


United States and emerging economies. Thank you very much to


all of you. I just want to look at tomorrow's front pages. The FT


predictably it's a big day: week echoes depths of 2008 crisis.


On the Independent: where are you, On the Independent: where are you,


EU? Britain takes �150 billion blow as debt chaos hits economy. So not


such a safe haven according Times. And that story we've had


today: the British team killed by polar bear in Norway. And the


going its own way: Eton pupil killed by polar bear.


That's all from Newsnight tonight, That's all from Newsnight tonight,


we will leave you with the site of Nasa's Juno spacecraft


Nasa's Juno spacecraft heading for Jupiter. It will fake five years to


get there by which time if you are an optimist you might say this


planet's economy might just have sorted itself out. Ignition, and


Apology for the loss of subtitles for 40 seconds


lift-off. MUSIC


you have outdoor plans. The weather will keep us on our toes. A


promising start for many. Showers will get going, and as you can see


by the afternoon they will be fairly widespread much pretty heavy


aisle-moving ones too - slow-moving ones.


Some brighter spells and a lucky few Some brighter spells and a lucky few


will stay dry through much of the day but showers never far away which


will keep temperatures down. Feeling breezy around southwestern coasts so


not ideal holiday making down Devon and Cornwall. Limited


brightness with showers coming in the breeze. A similar story across


Wales, a lot of cloud with from time to time. Northern Ireland


seeing some sunshine, I think, but even that will not help temperatures


much. 16C in Belfast and for Scotland some sunshine across more


northern areas but shower building up and turning pretty wet


into evening. and east of Scotland.


Download Subtitles