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Trump and China

November 9, 2016, by Hubert Fromlet, Kalmar

The United States is a global power. So is China. Two global powerhouses should get along. Will this be the case with president Trump? This is an important question,

It is a clear matter of fact that the political relations between the U.S. and China were in the worst shape for several decades already before the American presidential election. Thus, it seems to be hard to predict improved political relations between Washington D.C. and Beijing any time soon. The question seems to be rather how much these sensitive political relations can deteriorate further if Trump’s heavy protectionist threats against China come true.

Brexit, the possible or probable death of TTIP, increasing American protectionism against China, a possible future populist president in France, etc ., are challenges that can/will contribute to increasing protectionism in the world. Such a development is never positive and would certainly affect China negatively, particularly since China so far has been the main beneficiary from the past few decades of globalization and trade liberalization.

Conclusion: China has no choice but to conduct a pragmatic political course vis-à-vis the United States.

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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Poland – do (central) banks ever learn?

June 15, 2016, by Hubert Fromlet, Kalmar

Trying to lower costs for interest rate payments is a natural human ambition. But nothing is free of charge. Risks may be increasing when potential gains seem to be achievable. In credit terms this is often about exchange rate risks for borrowing in foreign currencies. (This problem is, by the way, usually part of my classes in the first semester).

These considerations on credit conditions may happen by applying three alternatives: comparing nominal interest rates between two countries, expectations of a stronger own currency or both of these two alternatives as a simultaneous mix. However, the mostly existing exchange rate risks make things particularly difficult and speculative; the calculations have to be based on a forecast – and everybody should know that currency forecasts in principle are impossible. In other words: a lot of luck is needed if a credit in foreign currency really turns out to be profitable. In my view, taking such a risk is neither prudent nor smart.

But these speculations happen again and again – despite all the negative stories about it. In Sweden, we have some bad experience from the times of devaluations around 35-40 years ago when greed or limited intellectual capacity led to massive loans in Swiss francs to Swedish farmers; later on, accidents happened with lending in yen for pure domestic Swedish purposes. The same kind of mistake was also committed before the eruption of the so-called Asian crisis in the late 1990s, with several countries in mainly South East Asia being heavily involved. And the story behind the financial crisis in the Baltic countries more recently was not very different either.

Unfortunately, Poland also went into this trap – an accident I did not expect ten years ago after having met so many well-educated and well-understanding leaders at this country’s central bank from as soon as the early 1990s. From around 2006 onward, however, too many new Polish mortgage loans were granted in Swiss francs, combined with strong expectations of an ever strengthening zloty. In 2008, finally, this development was reversed. The zloty weakened on trend. The central bank and the banks should have reacted before that. The zloty moved at last on a long-lasting downward trend. Thus, previous expectations of very favorable credit conditions were not met anymore.

Consequently, many mortgage credits in foreign currency have become very expensive in the past few years. For this reason, the Polish government now tries to launch a package for converting these burdening credits in foreign currency into stable zloty loans. However, his transmission will not be easy – and very costly, too.

The question remains: Will banks – and even central banks – ever learn?

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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Argentina – better this time?

May 18, 2016, by Hubert Fromlet, Kalmar

This time, I change the content of my blog and turn to South America. Argentina is currently trying to reorganize and restructure its economy – not one single day too early. Now again, long-term observers of the Argentine economy may add.

The Kirchners certainly failed as presidents (2003-2015). Argentina’s relatively new president and former mayor of Buenos Aires – Mauricio Macri – is now trying to restore international confidence in his country by a much more market-oriented policy than the Kirchners were conducting. Some success can already be seen, for example by bringing back Argentina to international capital markets – though at a high interest rate and after an international compromise about the old government debt and the return to a floating currency system against the U.S.dollar (which led to a significant but unavoidable weakening of the peso).

Despite these and some other positive signals, the outlook for Argentina remains very uncertain. The country is still in a recession. Risks for social unrest are still in place.The budget deficit is high, and so is inflation after the abolition of important price regulations and the weaker exchange rate. Trying to give a better balance to the economy remains difficult.

In other words: l am not sufficiently convinced that Argentina will achieve sustainable progresss in its fight against the burdening economic hangover after the Kirchner era. My own analytical experience from Argentina and its economy makes me doubtful.

At least we can now see the start of a better economic policy for the fascinating country of Argentina. Let’s hope for the best ! But Macri and his team are still very far from the goal.

In the meanwhile, we can always watch all these wonderful fotboll players from the country of the pampas. They use to give us fun also during difficult times in Argentina’ economy. By the way, President Macri once was the head of Boca Juniors, the creator of many superstars of Argentine fotboll (soccer). Now he is the president of Argentina.

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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