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Archive for November, 2010|Monthly archive page

The Brilliance Of A Bailout

In Financial Engeneering, Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 30.11.10 at 16:32

The European Central Bank tried to force Ireland into an EU/IMF bailout, according to Irish Justice Minister Dermot Ahern. Today the ECB is forced to buy Irish bonds in the market to prevent the recently bailed out country’s economy from total collapse. And at the same time the ECB is increasing the bailout pressure on Portugal. Excuse me, but I can’t see the logic.

“The government was cleaned out in the negotiations.”

Michael Noonan


While the 111 billion dollar rescue package to Ireland was supposed to calm the financial markets, the exact opposite has happened. The volatility and the cost of insuring national debt by Credit-default Swaps is just getting higher and higher. Yesterday we saw the biggest slide in Spanish government bonds since the euro’s debut in 1999. Today the ECB is intervening in the market to keep Irish bonds from going down the tubes.

According to two anonymous sources, the ECB have bought a “small amount” of short time Irish government bonds Tuesday morning, Bloomberg reports.

The yield on Irish 2-year bonds are up by 0,14%, as of 1 PM (CET) today.

The cost of insuring Portugal against default rose 11.5 basis points to a record 551 today, according to CMA prices, and the ECB is now putting pressure on the Portuguese government to apply for a bailout, according to the Irish minister Dermot Ahern.

“Clearly there were people from outside this country who were trying to bounce us in as a sovereign state, into making an application, throwing in the towel before we had even considered it as a government,” Ahern says in an interview with the Irish state broadcaster RTE today. Adding: “And if you notice, they are doing the same with Portugal now.”

Asked about who was pressuring Ireland, he says: “Quite obviously people from within the ECB.”

Ireland’s crisis has forced the ECB to buy government bonds and pump money into its banking system.

Irish domestic lenders increased their reliance on ECB funding by 3.3 percent in October and the central bank today purchased more Irish bonds, according to two people familiar with the transaction, Bloomberg reports.

The bailout has sparked a wave of domestic criticism accusing Prime Minister Brian Cowen of giving up the country’s sovereignty for punitive terms.

More than 50,000 people took to the streets of Dublin on November 27, the day before the government agreed an average interest rate of 5.8 percent for the loans from the EU and IMF.

“The government was cleaned out in the negotiations,” says Michael Noonan, finance spokesman for Fine Gael, the largest opposition party.

“The interest rate of 5.8 percent is far too high and verges on the unaffordable.”

The Irish Bailout - Illustrated

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The risk for Europe is that Spain’s economy is twice as big as that of Greece, Ireland and Portugal combined, meaning the euro region’s 750 billion-euro bailout fund may not be big enough if the country resorts to aid. Spain’s 10-year government bonds slid yesterday by the most since the euro’s debut.

The extra yield investors demand to hold the securities instead of benchmark German bunds widened to euro-era records.

(See also: Belgium Joins The PIIGS: And Then They Were Six)

“The big elephant in the room is not Portugal but, of course, it’s Spain,” Nouriel Roubini, the New York University professor, said at a conference in Prague yesterday. “There is not enough official money to bail out Spain if trouble occurs.”

The European Central Bank may have to step up purchases of Spanish government bonds and backstop its banking system if the country runs into financing difficulties, Citigroup’s chief economist, Willem Buiter, wrote  in a note to investors yesterday. “Once Spain needs assistance, the support of the ECB will be critical,” Buiter said.

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10-year sovereign spreads (against 10 year German bunds)

Previous Day Close Yesterday’s Close This morning
France 0.459 0.521 0.535
Italy 1.753 1.993 1.998
Spain 2.538 2.787 2.746
Portugal 4.484 4.564 4.477
Greece 9.299 9.329 9.79
Ireland 6.866 6.966 6.956
Belgium 1.013 1.214 1.192

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Belgium Joins The PIIGS: And Then They Were Six

In Financial Markets, International Econnomic Politics, Law & Regulations, Quantitative Finance, Views, commentaries and opinions on 30.11.10 at 03:34

Those hoping for a euphoric reaction to the weekend bailout of Ireland must have been disappointed today. Even Italy, which many had started to regard as no longer a PIIG, matched its record wide. Contagion fears have certainly not been assuaged; if anything, they have become more heightened.

“And the rate at which Belgium is widening means that we may have to find a new derogatory acronym.”

Gavan Nolan


The Markit iTraxx SovX Western Europe index surged to another record wide and the two Iberian sovereigns broke the record levels that they hit last week.

Ireland’s funding needs for the next two years seem to have been settled by the bailout, albeit at a less than generous average rate of 5.8%.

And the fact that bank senior bondholders won’t be sharing the burden before 2013 has been welcomed by the markets, if not by the Irish people.

But the political risk remains ahead of the December 7 budget, Gavan Nolan at Markit Credit Research points out.

“The consensus seems to be that the coalition government will manage to get it through, but there is no guarantee that the incoming government early next year will not want to renegotiate the terms of the bailout.”

The rescue of Ireland by the EU/IMF was more or less priced into Irish spreads, so the widening was concentrated in the other peripherals (bar Greece).

“Speculation that Portugal is next in line has intensified and has now spilled over into sovereigns – such as Belgium – that were perceived as relatively safe a few months ago,” Nolan Writes.

Core euro zone countries have also widened significantly.

Banks lost the gains they made this morning, the sovereign debt concerns outweighing the relief from the lack of “burden sharing” for Irish bank senior bondholders.

AIB and Bank of Ireland senior CDS, unsurprisingly, outperformed the rest of the sector, though liquidity remains poor on these names.

(Markit Liquidity Scores of 3 and 4 respectively).

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  • Markit iTraxx Europe 115bp (+5), Markit iTraxx Crossover 515.5bp (+21.5)
  • Markit iTraxx SovX Western Europe 198bp (+10.5)
  • Markit iTraxx Senior Financials 166bp (+1.5)
  • Sovereigns – Greece 960bp (-4), Spain 353p (+28), Portugal 545bp (+43), Italy 249bp (+34), Ireland 615bp (+15), Belgium 188bp (+29)

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WikiLeaks Under Massive Cyber Attack

In Financial Engeneering, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Views, commentaries and opinions on 30.11.10 at 03:08
WikiLeaks.org says its website is targeted by a massive computer attack. The attack started just hours before the  expected release of classified US documents. In spite of the attack, the files have been released, revealing among other things that the US government ordered surveillance of UN. leaders.
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“The US  military must electronically assault WikiLeaks and any telecommunications company offering its services to this organization.”
Former US State Department Adviser

CNN reports that a hacker named “the Jester,” who claims to have been involved with US Special Forces, is claiming responsibility for the attack on the Wikileaks site “for attempting to endanger the lives of our troops, ‘other assets’ and  foreign relations.”
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At 7:30 PM the Cablegate.Wikileaks.org web site is up, though the group says “the embassy cables will be released in stages over the next few months.”
In another poke at the US government, WikiLeaks is using Seattle-based Tableau Software, a visualization company that grew out of a Defense Department project, to host some of the files.
The New York Times, which claims it did not get the files directly from WikiLeaks but honored the embargo, has posted an interesting exchange between Assange and the US embassy in London. The Obama administration never asked the NYT not to publish.
And here’s one intriguing document highlighted by British newspaper, The Guardian: At least as of mid-2009,Israel believed it had until December 2010 to attack Iran’s suspected nuclear facilities!
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Details US surveillance
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According to the documents, Secretary of State Hillary Clinton last year ordered clandestine surveillance of United Nations leadership, including obtaining “security measures, passwords, personal encryption keys, and types of VPN versions used” and biometric information.

The July 2009 directive issued under Clinton’s name, which also asks for details about “information systems, networks, and technologies used by top officials and their support staffs,” sheds a  rare light on the shady world of government espionage.

That classified dispatch is part of a massive document dump, about 250,000 diplomatic cables, that began appearing on the Internet this morning.

WikiLeaks provided the files in advance to news organizations including Germany’s Der Spiegel and Spain’s El Pais and has said it would wait before releasing the cables on its own website.

Chinese Leaders Behind Google Attacks

Another disclosure from the files is that China’s Politburo ordered the electronic intrusions into Google’s computer network that became public in January, prompting the company to rethink its Chinese operations, according to what a Chinese contact told the US embassy.

China has denied the charges.

That intrusion was reportedly conducted by a combination of government hackers and private security experts, who reportedly also targeted US government computers, those of the Dalai Lama, and other American companies.

Some of the companies that previously been named as victims include Yahoo, Symantec, Northrop Grumman, and Dow Chemical, and Adobe Systems has confirmed a “sophisticated, coordinated attack” against its corporate network.

Leaked From The US

It seems like the economy is not the only thing leaking in the US.

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The files appear to have originated from the US Defense Department‘s SIPRNET, which is used for exchanging information up to the secret level and is jointly administered by the NSA, the Defense Intelligence Agency, and the Defense Information Systems Agency.

SPIRNET itself stands for Secret IP Router Network.

In July, Pfc. Bradley Manning was charged with obtaining “more than 150,000 diplomatic cables” in violation of the law and is suspected of being WikiLeaks’ source.

First Cyber Attack By US Government ?

The Washington Times and a former Bush administration official suggest that WikiLeaks.org is the first public target for an US government cyber attack.

In addition, a Republican senator have  proposed a law targeting WikiLeaks, and conservative commentators have called for WikiLeaks front man Julian Assange to be arrested.

Sweden has issued an international arrest warrant for Julian Assange – for the second time – after he was upheld by an appeals court on sexual assault charges.

Assange was later released due to lack of evidence, but now it seems like “the evidence” suddenly has turned up again…

The White House have issued the following statement:

“These cables could compromise private discussions with foreign governments and opposition leaders, and when the substance of private conversations is printed on the front pages of newspapers across the world, it can deeply impact not only US foreign policy interests, but those of our allies and friends around the world. To be clear–such disclosures put at risk our diplomats, intelligence professionals, and people around the world who come to the United States for assistance in promoting democracy and open government.”

Australia is investigating whether today’s release violated its laws. (Assange has an Australian passport.)

Labeled As Terrorists
Conservative commentators argues that Wikileaks.org should be shut down by any means necessary.

One Washington newspaper argued that WikiLeaks’ offshore Web site should be attacked and rendered “inoperable” by the US government.

An US State Department adviser, who served under President George W. Bush, writes in a column that the US  military must “electronically assault WikiLeaks and any telecommunications company offering its services to this organization.”

And some have already labeled WikiLeaks as a terrorist organisation.

Related by The Swapper:

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EU: No Bail In, Just Eternal Bailouts

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Views, commentaries and opinions on 29.11.10 at 16:42

It ought to be a happy day for the bondholders of the world. The informal Eurogroup decided Sunday that the Irish rescue plan will not bail in senior bank bondholders and force them take a “haircut” on their liabilities. A decision likely to make precedence for the many bailouts to come. However, Germany and France insist on a bail in facility to be implemented when the 750 billion euro bailout fund, created in May this year, becomes a permanent stabilizing mechanism when it expires in 2013.  But this will only apply for debt issued thereafter. The brilliance of this solution is;  since bond issuers and bond investors, pretty much, are one and the same big banks – it becomes an eternal bailout mechanism.

“The rescue plan stands as a forceful response to vulnerabilities in the banking system.”

Dominique Strauss-Kahn


As usual, the IMF-boss Dominique Strauss-Kahn provides us with valuable insight. It is indeed a forceful response to vulnerabilities in the banking system. First; they’re now protected for two more years. And second; if anyone should default on their loans issued after 2013, and forced to take a so-called “haircut,” there will be a permanent bailout mechanism available so that the bailed in banks can be bailed out again. Pure genius!

The EU countries and the International Monetary Fund (IMF) will provide up to €85 billion under the Irish package, which may be drawn down over a period of up to 7½ years, the informal Eurogroup said last night.

About €50 billion is aimed at bolstering Ireland’s public finances. Of the remaining 35 billion, 10 will be used to recapitalize Ireland’s demolised banking system, and 25 will be put in a contingency fund to provide the banks with additional support if necessary.

The IMF will contribute with a total of 22,5 billion. This include three bilateral loans from the UK, Sweden and Denmark.
Along with the rescue package comes a 15 billion austerity package to be distributed amongst the Irish citizens over the next four years.

The interest rates for the loans will also vary on the different parts of the package. ( But is in general close to 6%,  according to the statements).

Merry Christmas!

The EU leaders have almost scared the bond investors to death with their talk of bailing in bondholders to make them share the burden of the supersized debt bubble they’ve been creating over the years.

But at a press conference last night after the informal Eurogroup and EU’s finance ministers had endorsed the Irish rescue package at an emergency meeting, Olli Rehn said:

“I’m aware that the Irish authorities are considering certain discounts for the subordinated debt but there will be no haircut on senior debt, not to speak of sovereign debt”.

Adding: “The programme rests on three pillars. First, there will be an immediate strengthening and comprehensive overhaul of the banking sector. Second there will be an ambitious fiscal adjustment to restore fiscal sustainability of the sovereign. Third, there will be substantial structural reforms enhancing economic growth, especially in the labour market.”

The aim in the banking measures is to create a smaller and more robust financial system with a stable financing structure.

“It notably includes higher minimum regulatory requirements, plus a capital injection early on to bring capital ratios above the minimum. Moreover a new and rigorous stress test will be conducted based on a severe scenario and moreover, new legislation on insolvency and bank resolution will be introduced.”

Neiter this legislation will not include haircuts on senior debt, according to Mr. Rehn.

So, the major holders of Irish (and other sovereign) bonds can enjoy another big fat Christmas bonus.

(See: The Precious Irish Bondholders – Here’s The Full List)

Deutsche Bank has already decided to hand out the biggest bonuses ever this year to its executives.

Bailing In The People

Now – here’s some of the Christmas gifts for ordinary Irish people:

Labor market:

*Reduce national minimum wage by €1.00 per hour

* An independent review of the Registered Employment Agreements and Employment Regulation Orders.

* Reform of the unemployment benefit system

* Streamline administration of unemployment benefits, social assistance and active labour market policies.

* Reform of activation policies:
A: Improved job profiling and increased engagement;
B:  More effective monitoring of jobseekers’ activities with regular evidence-based reports;
C: The application of sanction mechanisms for beneficiaries not complying with job-search conditionality and recommendations for participation in labour market programmes.

Health Care:

* Medical Profession: Eliminate restrictions on the number of GPs qualifying, remove restrictions on GPs wishing to treat public patients and restrictions on advertising.
* Pharmacy Profession: Ensure the recent elimination of the 50% mark-up paid for medicines under the State’s Drugs Payments Scheme is enforced.

Pensions:

* Savings in Social Protection expenditure through enhanced control measures.

* Increase the state pension age to 66 years in 2014, 67 in 2021 and 68 in 2028.

Public Service:

* Reduction of public service costs through a reduction in numbers and reform of work practices.
* A reduction of existing public service pensions on a progressive basis averaging over 4% will be introduced.
* New public service entrants will also see a 10% pay reduction.
* Reform of Pension entitlements for new entrants to the public service
A: including a review of accelerated retirement for certain categories of public servants and an indexation of pensions to consumer prices.
B: Pensions will be based on career average earnings.
C: New entrants’ retirement age will also be linked to the state pension retirement age.

Taxes:
* A reduction in pension tax relief and pension related deductions
* A reduction in general tax expenditures
* Excise and other tax increases
* A reduction in private pension tax reliefs
* A reduction in general tax expenditures
* Site Valuation Tax to fund local services
* A reform of capital gains tax and acquisitions tax
* An increase in the carbon tax

The Enormous Growth Potential

In a joint statement IMF managing director, Dominique Strauss-Kahn, says the rescue plan stands as a “forceful response to vulnerabilities in the banking system”.

And for once, I totally agree with Mr. Strauss-Kahn.

“By shielding Ireland from the need to go to the markets for a considerable period of time, this support places financing at Ireland’s disposal on more favourable terms than it could obtain elsewhere for the foreseeable future,” the statement says.

(Just to be precise: It’s the Irish banks that are being shield)

“This programme articulates a clear strategy for tackling today’s problems and for harnessing the enormous growth potential of this open and dynamic economy.”

The enormous growth potential?

I better stop now, or I might write something rude and offensive.

You can read the full Iris government/IMF statement for your self here.

Related by The Swapper:


A Euro Vacation (2010 Summary)

In Financial Engeneering, Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Philosophy, Views, commentaries and opinions on 29.11.10 at 01:46

WilliamBanzai7: “Every January, the Global Ponzi Elite ascend to Davos Switzerland to congratulate themselves on the fine job they are doing of fleecing the rest of us.You will recall that the current Euro debacle started picking up steam precisely on the week of the Davos meeting this past January.”


Well, as we’re approaching The World Economic Forum of 2011, I guess it’s only appropriate to look back at what we’ve been through during 2010:

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The blogger WillianBanzai7 has caught may people attention this year with his artistic – and humorous – coverage of the financial crisis.

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A visit to his gallery is highly recommended.

“Anyone who continues to claim that the global financial meltdown is an exclusive product of the good ol’ US of A is 100%, a certifiable douche bag on steroids. The same nefarious crew of Internationale Ponzi Globalists that availed itself of Bernanke and Geithner‘s bailout largesse when AIG hit the skids, is waiting to be saved yet again in Ireland. Meanwhile, the one called Deutsche Bank has already announced it’s intention to once again pay record banksta bonuses this Christmas. Merry Christmas (Fröhliche Weihnachten!) Europe!”

WB7


(The full post at www.zerohedge.com)

Another Sunday – Another EU Crisis Meeting

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Views, commentaries and opinions on 28.11.10 at 14:35

The “Informal” Eurogroup and the ECOFIN are meeting today, Sunday, at the EU headquarter in Brussels.The informal group meeting officially starts at 15 PM (CET) , the ECOFIN meeting is set to open at 16 PM. On the agenda is, among other things, the final approval of the Irish bailout. (Please, don’t ask me how an informal group can approve an official international bailout!)

The Informal Euro Group

It’s not clear whether the meeting will be broadcasted LIVE, or not. If it does, I’ll add a link here on this page. However, several of the EU ministers made short comments when they arrived on doorstep at the EU headquarter in Brussels earlier today.

Here’s French finance minister Christine Lagarde:

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Here’s Belgium’s deputy prime minister, Dider Reynders, making comments before the Eurogroup and ECOFIN meeting on 28 November in Brussels:

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Elena Salgado, Deputy Prime Minister and Minister for Economy of Spain, made the following remarks when arriving Brussels:

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Wolfgang Schauble, federal minister for finance of Germany arriving in Brussels:

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Vice Chancellor and Federal Minister for Finance of Austria, Josef Prôll, comments at the arrival in Brussels before today’s Eurogroup/ ECOFIN meeting:

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One of the last to arrive Brussels this Sunday is UK’s Chancellor of the exchequer of the United Kingdom, George Osborne:
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    Bail In The Banks – Or Break Up The Euro Zone?

    In Financial Engeneering, Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Philosophy, Quantitative Finance, Views, commentaries and opinions on 27.11.10 at 23:51

    Slovak finance minister,Ivan Miklos, seems to be one of the few EU leaders who is able to face the harsh reality of the European Monetary Union. The risk of a euro zone break-up is very real, he told reporters before the weekend – unless EU bail in the banks and make them share the financial burden of the sovereign debt problems. The Slovak government now considers the euro zone as a hostage of the financial markets.

    “If we continue this way, we are close to a pyramid scheme.”

    Iveta Radicova


    The financial messed up euro zone risk breaking up, unless EU force the banks to eventually share the cost of the crisis with the taxpayers, Slovakia‘s finance minister Ivan Miklos says. The Slovak finance government consider the Greek bailout an “essentially a mistake” that made precedence and eventually to the European governments being hostages of the financial markets.

    I belive this is the best summary of the European sovereign crises I’ve heard, so far.

    However, not that surprising as Slovakia was the only euro area member who refused to participate in the Greek bailout.

    If only the executives club in Brussels could start listening more to the folks in the so-called peripheral parts of their kingdom…

    Ivan Miklosš

    “Even during current conditions that are very tough, very complicated, and when the risk of the euro zone break-up – or at least of its very problematic functioning – is very real, despite all that, Estonia will become a new member in January,” finance minister Miklos said earlier this week, speaking to university students in the Czech capital, Prague.

    Ever since the Slovakian center-right government came to power in July this year, they’ve been calling for banks and private investors to pay their share of the clean-up bill, valid for all rescue operations under the euro zone umbrella.

    The Slovakian government considers the Greek bailout an “essentially a mistake” and a “precedent” that made European governments a “hostage” of financial markets.

    (A scenario the econotwist’s first described last winter: Why Should EU Bail Out Greece?)

    Iveta Radicova

    “If we continue this way, we are close to a pyramid scheme,” the Slovak prime minister Iveta Radicova, told journalists after a meeting, Wednesday, warning that a system of accumulating debts eventually risked falling like “a house made of cards”.

    “Once again, taxpayers are expected to pay the bill. Once again, the banks are being rescued,” Ms. Radicova says, hinting that Lisbon and Madrid could be next euro-buddys going hand in hand to the EU social services in Brussels.

    “I cannot rule out that we will be soon discussing other countries. And I must point out that Portugal and Spain form communicating vessels,” she says..

    And Euro zone experts are indeed busy discussing details of a future, permanent EU crisis instrument – a successor to the €750 billion backstop mechanism (known as the European Financial Stability Fund, EFSF) set to expire in mid-2013.

    Me, too!

    Germany and Finland put forward proposals on how to pull bondholders into a rescue operation of the current scale, with both floating the idea of a “collective action clause“.

    According to media reports, governments in crisis will first adopt tough austerity programmes, and then at a later stage restructure their debt in agreement with the majority of creditors.

    This could take form of extending the original repayment period, reducing interest payments or a write-down. Governments would not negotiate with each investor individually, however, but a majority of creditors would set the terms of the restructuring, the EUobserver reports.

    “The only reason for them [financial institutions] to change behaviour is to include them in the responsibility chain in case of financial trouble,” the Slovak PM Iveta Radicova argue.

    Related by The Swapper:

    The Worlds Most Contagious Countries – Here’s The List

    In Financial Markets, Health and Environment, International Econnomic Politics, Learning, National Economic Politics, Natural science, Quantitative Finance on 27.11.10 at 17:28

    I guess its about time to rewrite the old saying; “When Wall Street Sneezes – The World Catches A Cold.” Scientist have been able to map the developed countries economic interconnection, and the result is a bit surprising. It shows that some of the smallest countries, with the lowest gross national product, has in fact the greatest potential to create a worldwide financial havoc.

    “These smaller countries do not support only their local economy but are also a haven for foreign investments, as they attract funds from large countries for taxation purposes, safekeeping, etc, and a problem in such investments can easily lead to a chain reaction in other countries.”

    Antonios Garas/Panos Argyrakis/Céline Rozenblat/Marco Tomassini/Shlomo Havlin

    C12 - The Most Contagious Countries In The World

    According to the new research paper, the phrase “When Belgium Sneezes, The World Catches A Cold,” would be more accurate. Belgium, who has been without a government for six months and has one of the lowest GDP outputs in the world, is in fact among of the nations that easily can cause a major global financial crisis. The report by IOP Science list the 12 most economic contagious countries in the world – hereby named the C12.

    The new analysis of countries’ economic interconnectedness finds that some of the countries with the greatest potential to cause a global crash have surprisingly small gross domestic production.

    Using data from Bureau Van Dijk — the company information and business intelligence provider — to assess the reach and size of different countries’ economies, and applying the Susceptible-Infected-Recovered (SIR) model, physicists from universities in Greece, Switzerland and Israel have identified the twelve countries with greatest power to spread a crisis globally.

    The research published on Nov. 25,  2010, in the New Journal of Physics, groups Belgium and Luxembourg alongside more obviously impactful economies such as the USA in the top twelve.

    Here’s the “C12” nations:

    1. USA
    2. France
    3. United Kingdom
    4. Sweden
    5. Japan
    6. Spain
    7. Switzerland
    8. The Netherlands
    9. Italy
    10. Germany
    11. Belgium
    12. Luxembourg

    Except for USA and France, they’re all  – almost – equally dangerous if a crisis occurs on a national level.

    Note:  Six of the eight wealthiest nations in the world – G8 – is on the list.

    “This is explained by the fact that these smaller countries do not support only their local economy but are also a haven for foreign investments, as they attract funds from large countries for taxation purposes, safekeeping, etc, and a problem in such investments can easily lead to a chain reaction in other countries. Countries such as Luxembourg and CH, which are the headquarters for some of the world’s largest companies and subsidiaries, interact very strongly with a large number of countries. For example, about 95% of all pharmaceutical products of the Swiss industry is not intended for local consumption but for exporting,” the scientists write.

    Using a statistical physics approach, the researchers from the Universities of Thessaloniki, Lausanne and Bar-Ilan used two different databases to model the effect of hypothetical economic crashes in different countries.

    The data used allowed the physicists to identify links between the different countries, by mapping the global economy to a complex network, and gauge the likelihood of one failed economy having an effect on another.

    One network was created using data on the 4000 world corporations with highest turnover and a second using data on import and export relations between 82 countries.

    In addition, the SIR model, successfully used previously to model the spreading of disease epidemics, is applied to these two networks taking into consideration the strength of links between countries, the size of the crash, and the economic strength of the country in potential danger.

    When put to the test with the corporate data, the USA, the UK, France, Germany, Netherlands, Japan, Sweden, Italy, Switzerland, Spain, Belgium and Luxembourg were part of an inner core of countries that would individually cause the most economic damage globally if their economies were to fail.

    Using the import/export data, China, Russia, Japan, Spain, UK, Netherlands, Italy, Germany, Belgium, Luxembourg, USA, and France formed the inner core, with the researchers explaining that the difference – particularly the addition of China to this second list – is due to a large fraction of Chinese trade volume coming from subsidiaries of western corporations based in China, according to the report.

    The researchers write:

    “Surprisingly, not all 12 countries have the largest total weights or the largest GDP. Nevertheless, our results suggest that they do play an important role in the global economic network. This is explained by the fact that these smaller countries do not support only their local economy, but they are a haven for foreign investments.”

    The Big Bang of Belgium

    Belgium – who now have been without a government for six months – is held up as an example.

    “We find that countries in the nucleus can spread a crisis to larger parts of the world compared to countries in the outer shells, even if the crisis originates in a small country, such as Belgium.”

    “Zoom of the area showing the spreading for smaller crisis magnitudes (m). The dashed line shows the spreading of a crisis originating in Belgium, which is one of the smaller countries that belong to the nucleus of the network. Note that a crisis originating in Belgium, as m gets larger, becomes more severe in comparison with the average case for all countries in shell 11, (e). Fraction of nodes infected by a crisis originating from different shells of the network versus its magnitude m for ITN, (f) Zoom of the area showing the spreading for smaller crisis magnitudes (m). The dashed line again shows the spreading of a crisis originating in Belgium.”

    It’s hard to imagine, but the scientist writes that a crisis originated in Belgium has the potential to infect 95 percent of the global economy:

    “Considering the example of Belgium – ranked 29th according to its total GDP – we find that a crisis originating in this country (with magnitude m = 4.5), is able to affect for CON almost 60% of the world’s countries (average result of 50 realizations), while the worst-case scenario that is given by the maximum value of the fraction of infected countries (out of the same 50 realizations) is 95% of global infection,” they write.

    The Potential Impact of Belgium

    This story was first published by ScienceDaily.com on November 26, based on materials provided by Institute of Physics, via EurekAlert!, a service of AAAS.

    Here’s a copy of the full report, downloaded from IOP Science.com.

    Related by The Swapper: