Slovenia isn't Cyprus, but that doesn't Mean it's Not in Trouble

Leo Tolstoy wrote that all happy families are alike, but each unhappy family is unhappy in its own way. Much the same is true of economies. Maybe that was what EU Commission President Jose Barosso had in mind when he said recently that, “it is a completely different situation in Cyprus and in Slovenia.” Different, but in many ways no less dangerous. For those struggling to keep up with the ever-evolving euro crisis, here are some of the key ways in which the impending crisis in Slovenia differs from—and resembles—the others.

The macroeconomic context

As in many other countries, the crisis in Slovenia, which now centers on the banking system, has developed against a background of broader macroeconomic problems. Not long ago, Slovenia’s economy was doing well. The country was one of the ten that entered the EU in 2004. Like others in its cohort, it initially enjoyed rapid economic growth. The following chart, which compares Slovenia’s economic growth since 2000 with selected other countries, shows that before the global financial crisis, Slovenia looked a lot like Poland, one of the EU’s biggest success stories. Since the crisis, it has looked more like Portugal.



What accounts for the shift from success story to problem case? Although many factors were at play, two were especially significant. >>>Read more

A Disappointing, Procyclical, and Highly Politicized Budget

The White House has officially unveiled its budget for fiscal year 2014. I hope to have a chance to look at some of the numbers and programs in depth over the coming weeks, but the overview alone confirms what many leaks have suggested, namely, that this is a disappointing, highly politicized document. Here are some first impressions:

A commitment to continued procyclical austerity

The first thing the proposal makes clear is that the White House has joined Congressional Republicans in a bi-partisan commitment to austerity. It promises $1.8 trillion of additional fiscal consolidation over 10 years, in addition to $2.5 trillion already achieved, about the same as the GOP is looking for. The only difference is a fig leaf’s worth of proposed new revenue in the White House version, $1 for each $2 of spending cuts.

Under the proposal, federal tax receipts would reach 20 percent of GDP by 2020, about same as would have been allowed by such conservative initiatives as a balanced budget amendment proposed last year by Sen. Orin Hatch. True, some Republicans have held out for a still lower target, but even capping tax receipts at 20 percent of GDP would, in view of the demographic realities of an aging population, mean a much smaller government than Americans have become accustomed to during most of the post-World War II period. (See here for some relevant charts.)

The path of fiscal policy under the budget proposed by the White House continues the procyclical pattern that has prevailed for most of the past decade. A countercyclical policy would move the structural balance (that is, the surplus or deficit adjusted to take account the state of the business cycle) toward deficit when the economy is operating below its potential and toward surplus only after it approaches or reaches full employment. Instead, the pattern since 2010, and continued under the budget plan, is exactly the opposite.>>>Read more

US Payroll Job Growth Slows; Unemployment Rate Drops as Labor Force Shrinks

The U.S. economy created a disappointing 88,000 payroll jobs in March, according to today’s report from the Bureau of Labor Statistics. That was down sharply from the 268,000 gain in February. The unemployment rate fell to 7.6 percent, a new low for the recovery, but even that was largely due to a drop in labor force participation.



The bulk of the 88,000 new jobs were created in the private service sector. Professional and business services provided 51,000 jobs, followed by 44,000 in educational and health services. Goods producing industries contributed just 16,000 jobs, mostly in construction. Manufacturing employment fell slightly. Government employment continued its long downward trajectory, led by a loss of 14,000 federal jobs. State government employment gained slightly and local government jobs barely changed. >>>Read more

Follow this link to view or download a classroom-ready slideshow with charts of the latest US employment situation

Why Hasn't the US become another Greece?

How many times have we heard the warning that if the government in Washington doesn’t change its ways, the United States could become another Greece? Three years ago, when the crisis in Greece was just getting underway, I wrote a post making some comparisons between Greek and U.S. fiscal performance, along with a separate slideshow that presented a supporting set of charts. One key chart showed the two countries’ fiscal balances moving in an ominously parallel pattern that suggested that the United States might be about to follow Greece down the fiscal drain.



Last week, a reader who had run across the old slideshow scolded me for having been an alarmist. While the crisis in Greece has morphed from a crisis into a disaster, he pointed out, the U.S. economy has gradually recovered and its fiscal balance has improved markedly. Why? What were the key factors that made the difference? >>>Read More

Follow this link to view or download a classroom-ready slideshow version of this post complete with additional charts.

Latest US GDP Data Show Economy Weak at Year’s End but Corporate Profits Near Record High

The latest data from the Bureau of Economic Analysis confirm that the U.S. economy barely grew in Q4 2012. However, despite the weak economy, corporate profits as a share of GDP hit their second highest level ever.

Based on the latest data, the BEA revised Q4 real GDP growth upward from an annual rate of 0.1 percent to 0.4 percent, still the second-slowest quarterly growth since the recovery began in 2009. The following table compares the latest revision to the second estimate released last month.


Consumer spending was weaker than previously reported, with durable goods accounting for most of the growth that did take place. Fixed investment was a relative bright spot, led by business equipment and computers. However, growth of fixed investment was almost wholly offset by a decrease in nonfarm inventories. The BEA data provides no direct indication of the motive for inventory change, but it is easy to imagine that at least some businesses were showing caution about restocking, in view of anticipated tax increases and cuts in government spending for early 2013. >>>Read more

Follow this link to view or download a classroom-ready slideshow with more charts of the latest US GDP and profits data

Follow-up: Further Program Notes for the Cyprus Banking Drama

Last Friday I sketched out some program notes for the Cyprus banking crisis. The notes explained the origin of the banks’ losses (Act 1) and the tools that regulators could choose from to resolve the crisis (Act 2). Now the curtain has gone up on Act 3. The government of Cyprus and the EU-ECB-IMF “Troika” have agreed on a resolution plan. By and large, it uses the familiar building blocks of past systemic bank restructurings, but it puts them together in some unusual ways. Here is a brief outline, based on numerous press reports circulating this morning:

Act 3, Scene 1: Liquidation of Laiki Bank

The country’s second largest bank, Laiki Bank, will be liquidated. Deposits over €100,000 will be transferred to a “bad bank” along with the bank’s portfolio of toxic assets, which include large amounts of Greek government bonds and nonperforming real estate loans. Shareholders of the bank will be wiped out, along with both senior and junior unsecured creditors. The large deposits will be frozen for the time being.>>>Read more

Bailouts, Bail-ins, Haircuts and All That: Program Notes for the Cyprus Banking Drama

Ireland, Iceland, now Cyprus—the story of small countries with oversized banking systems is all too familiar. There is never a shortage of commentary when a crisis erupts, but much of it assumes a working knowledge of financial terms and concepts. General readers are left wondering—What is a haircut? What is the difference between a bailout and a bail-in? Who wins and who loses when the government steps in to rescue a failed bank?

I know the feeling behind these questions. It is the same as I get when I go to an opera sung in an unfamiliar language. If you are among those who ask such questions, what you need are some program notes to help you understand the Cyprus drama, and by extension, other banking crises like it. (If you want still more detail, check out this slideshow that complements these program notes.)

Act 1, Scene 1. How can we tell if a bank has failed?

System-wide banking crises like that in Cyprus always begin with the failure of individual banks. In principle, it ought to be easy to tell when a bank has failed. In practice, that is not always the case. >>>Read more

For more, follow this link to view or download a classroom-ready tutorial on bank failures and bank rescues