More on the euro zone deficit report

Yes, the deficit went from 6.3% to 6% of GDP, but the question remains as to whether they are at the point where further slowing from austerity measures continue to reduce the overall deficit or, instead, an induced slowdown begins to increase it.

Euro Zone 2010 Deficit Shrinks, Debt Rises

April 26 (Reuters) — The euro zone’s aggregated budget deficit fell last year as most countries slashed government spending to restore market confidence in public finances, but the debt still grew, Eurostat data showed.

The European Union’s statistics office said on Tuesday the budget deficit in the euro zone in 2010 was 6.0 percent of gross domestic product, down from 6.3 percent in 2009. Public debt, however, rose to 85.1 percent from 79.3 percent in 2009.

All euro zone countries except Germany, Ireland, Luxembourg and Austria improved their budget balance last year, but debt rose in all euro zone countries except Estonia.

Eurostat said Greece, which was forced to seek emergency funding from the euro zone last year because it was effectively cut off from market borrowing due to its large debt, cut its budget gap to 10.5 percent of GDP from 15.4 percent in 2009.

This is well above the initial target of the Greek austerity programme of 8 percent and even above the latest estimate from the European Union and the International Monetary Fund of 9.6 percent.

Greek public debt rocketed to 142.8 percent of GDP from 127.1 percent in 2009.

Ireland saw its budget deficit more than double to 32.4 percent of GDP last year from 14.3 percent in 2009 and its debt jumped to 96.2 percent from 65.6 percent as the country had to borrow to bail out its banking sector.

Euro-Area Debt Reaches Record 85.1% of GDP as Crisis Festers

It’s hard to say from the headlines whether proactive deficit reduction measures are slowing the economies to the point where the slowing is causing their deficits to increase.

However, if that is the case, continuing their deficit reduction efforts will only make things worse, to the point of forcing social upheaval.

And the rising deficits will begin to weaken the euro, as the deficit reduction that initially worked to strengthen the euro reverse.

And higher rates from the ECB will only serve to further increase national government deficits via higher interest payments by those same governments.

This also makes euro ‘easier to get’ and thereby weakens the currency.

Yes, the euro zone is seeing ‘inflation’, as they define it, moving higher, but under current conditions I don’t see any channel from rate hikes to lower ‘inflation’, again as they define it. But I do see how higher rates can instead add to the general price level through income interest and cost channels. All of which would be exacerbated should this policy also cause the euro to depreciate.

With regards to funding, there is nothing operationally to stop the ECB from, for all practical purposes, funding/backstopping the entire banking system as well as the national governments.

The question is the political will, which is not quantifiable.

And the solution remains painfully simple- the ECB can simply announce an annual payment of 10% of the euro zone’s gdp to the national governments on a per capita basis.

This will have no effect on inflation as it won’t get spent. It will only serve to allow all of the national governments to borrow at the ECB’s target rate, which would lower funding costs for the nations currently paying premiums for funding.

This will also give the ECB a lever to control deficits- the threat of suspending a nation’s funding if it is not in compliance.

And by removing the threat of market discipline from funding, the region would be free to set their stability and growth pact deficit targets at levels designed to achieve their macro economic goals for employment, output, and price stability.

Euro-Area Debt Reaches Record 85.1% of GDP as Crisis Festers

(Bloomberg) Euro-area debt reached a record in 2010. Debt rose in all 16 countries that were using the euro last year, lifting the bloc’s average to 85.1 percent of gross domestic product from 79.3 percent in 2009, the European Union’s statistics office said. Greece’s deficit topped expectations and debt ballooned to 142.8 percent of GDP, the highest in the euro’s 12-year history. Ireland’s debt surged the most, by 30.6 percentage points to 96.2 percent of GDP. Contingent liabilities from guaranteeing the banking system after the 2008 financial panic now amount to 6.5 percent of GDP, down from 8.6 percent in 2009, Eurostat said.

Saudi Uneasy With High Oil Price, Worried About Economy

Could be just talk or a prelude to a price cut.
No way to tell in advance- it’s a political decision on their part.

And it’s not illegal for them to place their personal and state bets first, and then cut price.
And it’s not illegal for them to cut any kind of a deal with anyone, anywhere in the world with regard to price.

In fact, it would be foolish not to.

Saudi uneasy with high oil price, worried about economy

By Cho Mee-young and Miyoung Kim

April 26 (Reuters) — Top oil exporter Saudi Arabia is uneasy with high oil prices and concerned about their impact on the global economy, the chief executive of state oil firm Aramco said on Tuesday.

Oil prices recovered from early losses on Tuesday, with Brent crude LCOc1 trading up 16 cents at $123.82 a barrel at 1059 GMT. Aramco Chief Executive Khalid al-Falih’s comments at an industry event in South Korea had weighed on sentiment earlier, when prices fell amid a wider decline in commodities.

“We are not comfortable with oil prices where they are today…I am concerned about the impact it could have on the global economy,” Falih told an industry gathering in South Korea.

There was no tightness in global oil markets, Falih said. His comments echoed those of Saudi Oil Minister Ali al-Naimi, who said last week that the kingdom had cut oil output in March as the market was oversupplied.

Unrest in North Africa and the Middle East and strong demand growth in Asia have pushed oil prices to their highest levels since 2008, triggering concern among consumers costly oil would harm economic growth and crimp fuel demand. OPEC producers also warned last week of the strain of high energy prices on economies still fragile as they emerge from the global financial crisis.

The kingdom has enough capacity to meet any spike in demand and plug short-term outages in supply, Falih said, adding that without Saudi spare capacity, oil price volatility would have been a lot worse when Libyan supply was lost.

OPEC’s largest producer boosted supply in February to above 9 million bpd to plug the gap left by fellow OPEC member Libya, where civil war cut exports. Saudi Arabia is the only oil producer with significant spare capacity to meet large supply outages such as that experienced in Libya.

Riyadh boosted capacity to 12.5 million barrels per day (bpd) in 2009, just as the global economic downturn cut demand. This left it with a supply cushion of over 4 million bpd, more than twice the spare capacity it targets of 1.5 million bpd to 2 million bpd. Output stood at 8.292 million bpd in March, down from 9.125 million bpd in February.

“People need to know that there are millions of barrels per day of spare capacity available,” Falih said.