Debt crisis and the future of Europe: Is Indonesia safe?

Winarno Zain, Jakarta | Sat, 11/05/2011 1:07 PM

The Greek drama surrounding its debt crisis is still unfolding, and it is clear by the day that the crisis is more severe than expected.

The resolution of the crisis will take several years and will be very costly and the magnitude of that cost will be beyond the financial ability of the eurozone governments.

Efforts to make decisions to resolve the crisis are facing the risk of being obstructed by policy paralysis resulting from political uncertainties that grip several euro countries.

All these were evident after eurozone leaders finished their summit on Oct. 27 in Brussels. They claimed to have crafted a “comprehensive policy” to contain the European debt crisis. But markets think the policy lacks meaningful details and leaves many questions. It reflects the daunting task of the eurozone leaders.

The problem is getting more serious as the amount of Greek debt that needs to be written off turns out to be larger than previously forecasted. In July, it was estimated that a 21 percent write down of Greek sovereign bonds would be sufficient to give some relief for the Greek government. But the Greek economy deteriorated rapidly, as austerity measures have caused a deeper recession than expected.

According to the IMF, the Greek economy will contract 5.5 percent this year and its debt will continue to rise reaching 186 percent of GDP in 2013. Its bond yield has reached a staggering 24.5 percent, a crushing debt load for the Greek government. That is the reason a 50 percent write off of Greek debt was envisaged by the European leaders during the summit. It should be implemented on a voluntary basis by investors holding Greek government bonds. If it is agreed, then it would mean a de facto default by the Greek government.

The risk is that it could lead to chaos in the credit-default swap (CDS) market that makes eurozone debt harder to insure. It could also lead to other countries having similar problems to Greece demanding the same amount of debt “hair cut”. All this would make banks more skittish in extending loans and this could stall economic recovery in Europe.

The debt crisis has hit European banks severely, as their holdings in Greek bonds have lost their value and significantly weakened their capital and their ability to lend. One Belgian bank had to be bailed out recently, while other banks with their severely weakened balance sheets would not be able to withstand bank runs and another debt default in Italy or Spain.

The agreement reached at the summit means that those banks would have to write down their Greek debt holding by 50 percent, which means a capital injection of ¤106 billion (US$146 billion) would be required by the banks for them to stay afloat. Banks are required to raise their capital ratio to 9 percent next year.

Unlike the US government that still had enough money to bail out some big banks in Wall Street during the 2008 crisis, the eurozone governments have no money to bail out banks. So the banks have to seek money from private investors, or else they have to cut dividends and bonuses.

Another tough issue for the eurozone countries is not only containing the debt crisis in Greece but also how to prevent the contagion of this debt crisis into other countries. Italy is the next worry. Its bond yield jumped from 5.7 percent to 6.1 percent last week, a level considered by the market as in the danger zone, and could exacerbate Italy’s debt burden. Italy is plagued with political uncertainties. Prime Minister Silvio Berlusconi does not appear to be a credible figure to inspire confidence in the market. Because Italy’s sovereign bond market is one of the biggest in Europe, its default would be catastrophic.

To prevent Italy defaulting means that investors must be persuaded to continue buying Italy’s sovereign bonds. To dispel worries and to inspire confidence among investors an entity called the European Financial System Facilities (EFSF) has been created to bail out governments and banks hit by the crisis. The problem is that EFSF funds of some ¤440 billion ($616 billion) are not sufficient.

A sort of financial engineering was attempted through guarantee mechanisms, whereby the fund is also used for insurance against loss in new bond issuances if there is a write down. In theory, this could “enhance” EFSF funds to ¤1 trillion ($1.4 trillion). To increase its potential funding, a special-purpose vehicle (SPV) would be created to attract funds from emerging economies, such as China and Brazil.

But it is doubtful whether China will lend a helping hand to Europe when it is facing hostility from EU governments on its exports to and investments in Europe. Why would China put their money in the EFSF when Germany and France themselves are reluctant to do the same? Besides, how could bond buyers have confidence in the guarantee by euro governments if they themselves are vulnerable to crises that hit their neighbors?

The debt crisis has strained the sanctity of the eurozone treaty and has exposed some of its flaws. Its members did not surrender their fiscal sovereignty to a supranational body, and the euro governments are unable to impose sanctions on member countries that breach the maximum limit of debt and deficits relative to GDP.

The single currency policy denies member countries any flexible policies in times of crisis. Being tied to monetary union, countries like Greece and Ireland can only improve their competitiveness through brutal and painful cost cutting. Monetary policy is exercised by the European Central Bank imposing a single interest rate within the eurozone. But there is the catch; a single interest rate by the European Central Bank impacted its member countries differently.

A low interest rate benefited such countries as Germany and France, but triggered excessive spending and inflation in Greece. There are rumors that because of the unresolved crisis Greece is thinking of leaving the European Union (EU). The eurozone will not break up of course, because the stakes are too high but many will start questioning its sustainability and viability.

A debt debacle that is more severe than expected would result in lower growth for the world economy than already forecast. This has started to impact the Indonesian economy. Indonesian exports dropped significantly in September, mainly due to a significant drop in exports to the US and EU. Between August and September, exports to the EU and the US fell by 28 percent and 15 percent, respectively.

Even our exports to ASEAN, our main export destination, also dropped by 2 percent, due to weak growth in Singapore and the floods in Thailand. As our exports continue to slow down in the coming months, it will be difficult for Indonesia to achieve its 6.4-6.5 percent growth target next year.

To compensate for the slower growth in exports the government should concentrate on policies to spur domestic consumption and investment.

The writer is an economist.

Future of RI oil, gas in deep water, frontier areas: Minister

The Jakarta Post | Wed, 05/18/2011 1:50 PM | Business

Unexplored oil and gas reserves in eastern Indonesia could be vital to the country's energy supply in future, Energy and Mineral Resources Minister Darwin Zahedy Saleh said Wednesday.

"While many oil and gas fields are maturing, continuing their natural decline, we're optimistic that the frontier and deep water areas, mostly in eastern Indonesia, will contribute significantly to future production," Darwin said at the opening of the 35th Indonesian Petroleum Association (IPA) Annual Convention and Exhibition in Jakarta.

He added that the government had launched several initiatives to encourage investment in this area, including to increase the number of offered working acreages for oil, gas, coal bed methane (CBM) and geothermal energy. 

"We're confident we'll see a positive response to new blocks offered in deep water and fontier areas such as Semai, Halmahera, West Ary, South West Timor and South Java," Darwin said.

ASEAN economies past and future

Maddaremmeng A. Panennungi, Jakarta | Wed, 05/11/2011 9:58 PM | Opinion

Many experts have forecast promising economic growth from member states of the Association of Southeast Asian Nations (ASEAN). And there are several reasons for such expectations, including the region’s advantageous location, global security, the global economy and its policies over the last two decades.

But history has also shown us evidence of the presence of great nations in the ASEAN region in the past. The golden age of Sriwijaya, Majapahit and many other kingdoms in Southeast Asia are in the remaking now, albeit under a different banner: ASEAN countries.

The most important reason for this is the location advantage of the region, which connects two economic giants, China and India, as well as the Middle East and Western nations.

The second most important factor is global security in the past and in the future. The formation of Singapore by Thomas Raffles and the “cooperation” between the British and Dutch in the early 19th century after the Napoleonic Wars in Europe provided security for an economic connection between some Southeast Asian countries and the rest of the world.

The rise of Singapore as the center of trade in Southeast Asia has also provided a better linkage among Southeast Asian nations. However, during the two world wars and the Cold War era, Southeast Asia was one of the centers of battles between great powers. Today, threats of terrorism have also affected this region, especially Indonesia.

The third most important factor is the global economy and its policies. In the past, before Arabs and Western influenced Indonesia, or when India and China became the poles of the global economy, the region was known as “the busy road”, which allowed nations on both sides of the Malacca Strait and Java to enjoy a golden age of trade growth.

If both India and China reemerge as great economic powers, the golden age of this region will reemerge. The simplest explanation of this could be taken from the gravity model: The increasing economic size of both India and China and “the attraction of the economic force” of these giants will impact positively on the economy of this and the ASEAN region.

Economic policy is another important factor in the future of this region. There are at least three institutions helping this region remain on the right track in international trade relations — ASEAN, APEC (Asia Pacific Economic Cooperation) and the WTO (World Trade Organization). Despite many criticisms, especially during the Asian financial crisis of the late 1990s and during the global financial crisis of 2008, these institutions have helped the world, particularly ASEAN, face the challenges.

ASEAN has ratified the AFTA (ASEAN Free Trade Agreement) and the ASEAN-China Free Trade Area (ACFTA). There also other forms of communication forums between ASEAN and other economies, especially with the European Union (EU).

The following facts will help us understand the big picture of economic relations between ASEAN and some major economies, particularly APEC member countries.

The dynamic economic relations between ASEAN founding members (ASEAN-5) and economic powers within APEC were manifested in their trade volume in 1999-2009. Trade between ASEAN-5 and China rose from 3.7 percent from the grouping’s total trade volume in 1999 to 11.1 percent in 2009; ASEAN-5 and Japan trade dropped from 15.9 percent in 1999 to 10.36 percent in 2009; ASEAN-5 and the US’ trade declined from 18.7 percent in 1999 to 9.66 percent in 2009; and trade between ASEAN-5 and APEC economies slumped from 75.1 percent to 72.8 percent in 2009.

The region’s advantageous location, global security, global economy and its policies during the period explain the trade relations well.

First, the ASEAN-5 countries are located in a strategic and advantageous region. Among the ASEAN-5, Singapore booked the fastest average economic growth during 1989-2009 with 6.73 percent, with Malaysia 6.15 percent, Indonesia 5.16 percent, Thailand 5.02 percent and the Philippines 3.79 percent. The location of Singapore and Malaysia near the Malacca Strait (and supported by their seaport infrastructure) are better than the other three economies. However, overall, this region has a very good location in connection with international trade.

Second, during the last two decades (1989-2009), there were no important global conflicts that affected this region. The war on terrorism has hardly impacted the region’s security either.

Third, during this period, the world economy grew by a positive 2.69 percent. APEC economies growth during the same period was 2.83 percent. In comparison economic growth of main APEC economic powers like Japan was 1.31 percent, the US 2.52 percent and China 9.98 percent.

Economic growth in simple average of ASEAN-5 (Indonesia, Malaysia, Philippines, Singapore, and Thailand) during the last two decades stood at 5.37 percent. This shows that ASEAN-5 and China’s economies are becoming more important in the world economy in APEC and the world.

ASEAN countries have a better choice in keeping their relations closer to each other. This strategy will give a better “power” because unilateral action will weaken individual nations in the face of great powers. As small open economies, ASEAN countries should be very responsive to the global events that build relations with the great economic and political powers.

ASEAN’s advantageous location is a blessing, but it will turn into a curse if members of the group act individually and only serve the interests of great powers as happened in the past.

The writer is a researcher at the University of Indonesia’s School of Economics and director of the university’s APEC Study Center (ASC UI)

Inexpensive books and succeeding in the future

Endy M. Bayuni, The Jakarta Post, Washington, D.C. | Wed, 05/11/2011 9:55 PM | Opinion

I had mixed feelings when Borders bookstore finally closed their outlet on the corner of L and 19th streets opposite my workplace a week ago. I had spent hours sitting in its café and between its shelves, browsing and reading from the huge collection.

But, in the four weeks before the closure, I visited the store every other day to take advantage of the fire sales with discounts of 20 percent that then rose to 40, 50, 60 and 80 percent in the last five days.

Longtime Washingtonians, however, said to shed no tears. They recalled that the arrival of Borders and Barnes & Noble, both giant American bookstore chains, on Washington’s streets one or two decades ago led to the closure of many independent bookstores.

Borders has become victim to the fierce book market it helped to shape. It filed for bankruptcy in February and plans on closing 200 of its 600 outlets in the US and abroad.

More Americans buy their books online, from Amazon.com and Borders and Barnes & Noble’s web sites. And, there is the growing migration to the digital world, with more people reading books on the Kindle, the iPad and other portable digital book readers.

One thing I learned since coming here early this year on a research program is that few people in the US pay full price for their books; only visitors or those who feel strongly about supporting their local independent bookstores do. For avid readers, there are many ways of getting your books aside from library loans.

For best-selling fiction and non-fiction, major department stores sell books at up to 60 percent off the cover price.

For more specialized or older books, check out Borders and Barnes & Noble. If you’re a loyal customer, membership confers large discounts and point awards that entitle you to more discounts in the future.

Online stores, and don’t forget the biggest one of all, Amazon, offer generous discounts like free shipping within the US and awards to build customer loyalty. Check out their used book section. I was amazed at the selection, including many out-of-print titles.

Most are reasonably priced as well. The listing indicates the book’s condition and where it will be shipped from. Put the book in a virtual shopping cart, enter your credit card number and it will be delivered in just a few days.

Most books I need for my research (on Indonesia) were bought this way. For example, I bought a good-as-new copy of Robert Hefner’s 2000 Civil Islam: Muslims and Democratization in Indonesia online.

Check out the regular book sales at your local library. Early in April, the Arlington Public Library, down the corner from my rented apartment, had a sale that lasted three days. Secondhand books were going for 50 cents, US$1, $2 and $4 apiece. On the last day, they were half the marked prices.

These book sales, surprisingly, offer a wide selection. My wife and I bought over 30 titles, not so much because we needed them but more because they were too good to pass up.

At 50 cents or a dollar apiece, we see it as renting the books. We will donate most of them to the library before it holds its next sale. You’re not just recycling books; you’re recycling knowledge and the wisdom contained in those pages.

America is heaven for avid readers, writers and researchers. Not only does it have one of the widest selections, but books are accessible and affordable for most pockets through discount plans, used book sales and recycling arrangements.

It is no wonder the United States consistently ranks highest in the world in terms of the number of books published. The widespread usage of English globally helps its case and many of the books are exported as well as sold domestically.

The United States is strongly represented at the top of global university rankings. The Times Higher Education put four US universities in the top 5, and 13 in the top 20. The QS ranking puts two universities in the top 5, but 14 in the top 20.

What is puzzling, however, is the weak correlation between these achievements and the academic performance of American students globally. Survey after survey indicates that the US education system is rapidly falling behind many other countries.

A recent test of 15-year-olds worldwide conducted by the Program for International Students Association ranked Americans between 15th and 25th in science, reading and mathematics, hardly reflecting the US’s global preeminence.

Mindful of the long-term implications of this decline, President Obama made education the centerpiece of his state of the union speech in January.

He made a passionate plea to Congress to spare investment in education, along with spending on health care, from the axe as the nation struggles to cut its huge federal budget deficit.

Obama invoked the “Sputnik Moment” in calling for more investment in education and technological innovation to restore America’s supremacy, just as it did in beating the Soviet Union in the race to the moon.

Can the United States succeed in the future once again? It will take more than books to pull it off, but at least Americans, in this race, still have the easiest access to a wide range of great books compared with people in most other countries. Take it from this short-term visiting writer: It all starts with reading.

The writer is a fellow at the East-West Center in Washington, D.C. and a senior editor at The Jakarta Post.

Euro crisis bleak future for ASEAN single currency

Putera Satria Sambijantoro, Jakarta | Wed, 04/20/2011 8:00 AM | Opinion

Economists and policymakers in euro-adopter countries are experiencing stormy weather outside their office windows.

Early this month the Portuguese government declared its inability to pay its debts and requested financial assistance from the EU. After the economies of Greece and Ireland collapsed last year, Portugal is the third euro-adopter country that has failed to pay its debts and ask for a bailout.

Besides, it may not be the last nation to follow the path of Greece and Ireland, and quite a few analysts claimed that debt-laden economies, such as Spain, Italy, France and Belgium, could be the next dominoes to fall.

The single currency policy in euro was said to be a great idea at the beginning; but looking at how recent events have unfolded, some optimists have become skeptics: Is the euro responsible for recent Europe’s mess?

The best way to understand the single currency’s predicament is to imagine that a nation’s economy operates like a huge Transformer robot.

Every nation — be it Portugal, Germany, Greece, Ireland, Spain and others — has its own robot model, where each robot has unique characteristics that work against each other.

What is similar about them is all the robots are armed with two guns both in their right and left hands (as seen in the movie), so they can protect themselves from their enemies and their overall stability can be
assured.

Suddenly, robots from European countries develop a seemingly great idea that they, apparently, can become stronger if they just unite and combine their small guns into one gigantic weapon. This can be done only if each robot is willing to sacrifice the gun in their left hand, so it can merge with other robots’ guns to transform into one gigantic, powerful weapon.

Several robots, such as from Croatia and England, refused the offer, but almost all European-built robots agree to this proposal. In the end, those robots boast a one-for-all gigantic and massive weapon as the reward for their unification, with the expense of having only one gun in their right hand as they continue their survival.

Today, the importance of those missing hands begin to be felt; but, unfortunately, now is simply the point of no return for those European nations.

Basically, to fix problems and avoid crises in the economy, a policymaker is equipped with two powerful “weapons”: A monetary policy related to interest rates and currency, and a fiscal policy related to tax and government spending. For example, the US implemented both fiscal and monetary policies in the form of a US$1 trillion tax cut (fiscal) and slashing the interest rate to the level of 0.25 percent (monetary) to resuscitate its economy during the last financial crisis.

But when euro-adopter countries such as Spain suffer from high unemployment rate like today, the Spanish policymaker could not simply adjust the interest rate (monetary) to shoot the problem. Because it uses the euro as a single currency, all policies relating to currency, which are monetary policies, have to be thoroughly discussed and carefully implemented for the sake of EU members as a whole, not a single country like Spain alone.

During this situation, other European countries such as Germany or France may have different economic interests to Spain’s, and slashing interest rates — a policy which would devalue the euro — perhaps would render those countries worse off.

In other words, it is true that those robots sacrifice one of their hands and hold a share in the massive weapon, but one simply cannot use the weapon as he pleases — because other robots, presumably,
may have different type of enemies to shoot.

What exacerbates the problem is not all European robots are armed with the right-hand weapon that is powerful enough to cover their left-hand weapon’s loss.

Countries such as Germany and Finland have a strong fiscal position, while the balance book of countries such as Greece and Ireland are full of debts and cannot really afford to spend much money on fiscal policies.

The consequences are predictable: The economies of Greece and Ireland defaulted, and EU member countries with strong fiscal positions suffered enormous economic losses as they had to provide multi-billion bailouts to help those ill-fated economies.

Meanwhile, Indonesia and its neighbors in the ASEAN region have been weighing the possibility of having a single currency such as the euro for years.

Some ASEAN representatives and economic ministers believed that the implementation of a single currency in ASEAN could take the economic community in the region to the next level, as it would enhance economic development in the area and forge stronger ties among ASEAN countries.

But currently, Europe’s crisis is a lesson to learn for Indonesia and ASEAN on the risks and to realize that the potential economic losses if the single currency policy fails is indeed massive.

Yes, it is true that the single currency has boosted trade numbers in the EU by as little as 10 percent since it was first implemented. But as recent events show, Europe’s single currency turns out to be a monetary trap and makes some economic problems more complex than they actually are.

If the euro fails in Europe’s developed and high-welfare economies, adopting a single currency in ASEAN — a region where developing and developed economies are living side-by-side and economic gaps among them are obvious — is definitely not a wise idea, at least not for now.

Indeed, after a decade full of applaud for Europe and its success story of single currency implementation, today is the day when the credibility of single currency policy is being put to its highest test.

The writer is a student at the University of Indonesia’s School of Economics.