Tags: North | Korea | Uncertainty | Global

North Korea Adds More Uncertainty to Global Woes

By    |   Monday, 19 December 2011 09:55 AM

The unexpected death of North Korean leader Kim Jong-il is the last thing the world and the markets need as it will add more uncertainty to a world that is awash with uncertainties.

One thing that seems clear is that Kim's youngest son, Kim Jong-un, who is in his late 20s already called the “Great Successor” will succeed his father. But the political succession in North Korea, which has developed an illegal nuclear weapons program and launched unprovoked attacks on South Korea, is completely uncertain. We can expect a nasty power struggle behind the curtains.

It will be difficult to read in the days ahead precisely what will transpire in terms of the North Korean leadership. Ambiguity and uncertainty will dominate the scene. The big question will be who will exercise the “real” power, especially when the military is concerned.

Understandably, South Korea's government went immediately on emergency status and Japan has called an emergency security meeting to formulate its reaction to the death of Kim. The provocation of an “incident” should not be ruled out.

Putting geopolitical uncertainties and risks aside for a moment and coming back to the ongoing eurozone crisis, German Finance Minister Wolfgang Schaeuble told German radio: “Washington cannot make bilateral loans available to the IMF without Congress approving it, that's the way it's done in the United States. And there's no chance of that and the American government has always made that clear.”

Long-term investors should not build on “hopes” and certainly should not forget that where the eurozone crisis will go, there will go the markets. It’s as simple as that. Unfortunately, I can’t see (and I’m not alone) a serious, transparent, workable and sustainable solution yet.

Speaking recently at the U.S. State Department, IMF Managing Director Christine Lagarde said the outlook for the world economy was “quite gloomy.”

She stated: “There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies that will be immune to the crisis that we see not only unfolding but escalating … It is not a crisis that will be resolved by one group of countries taking action. It is going to be hopefully resolved by all countries, all regions, all categories of countries actually taking action … It is going to require efforts, it is going to require adjustment, and clearly it is going to have to start from the core of the crisis at the moment, which is obviously the European countries and in particular the countries of the eurozone.”

I can’t see how the European leaders will be able to crack their Gordian knot at a moment the eurozone is relapsing into recession and austerity measures are imposed.

A recent study performed by Deutsche Bank AG/London remembers that in the three decades leading up to the introduction of the euro, significant and continuous currency adjustments were needed for the vast majority of the members of the initial 12 EU countries (Greece entered in 2001/2012) against the German mark.

Since the euro was introduced on Jan. 1, 1999, it has become obvious the competitiveness of all of these countries in regard to Germany has continued to deteriorate enough to suggest that further significant devaluations would have occurred had the euro not been put in place.

The result for all these eurozone member states is that the “Real Effective Exchange Rate” of the single currency for their respective countries are overvalued by as low as 15 percent for Austria and as high as nearly 35 percent for Italy.

Indeed, today’s five weak “peripheral” countries have all effectively seen their “currency appreciate” versus Germany by 25 percent to 35 percent since they fixed their currencies within the euro. These huge differences give us an idea of how much competitiveness they all have lost to Germany over a little bit more than a decade since the euro was introduced.

Given such a move it should not come as a surprise to see economic and funding problems emerge while social and political tensions will likely be high in all those countries that now also face recession and austerity at the same time.

Yes, the eurozone faces huge and still (unfortunately) growing “imbalances,” and as long as that situation doesn’t get an earnest solution there won’t be a solution the eurozone crisis at all. In my opinion it would be a mistake the eurozone could become one day: “All for one, one for all.” Of course, wonders do happen…

In my opinion, I’m convinced the eurozone as it is composed by the 17 countries today, has actually the “wrong” (not all!) members.

Keep in mind that these countries as a whole will need to refinance more than 800 billion euros in 2012, which is a little bit more than $1 trillion dollars at today’s exchange rate.

Long-term investors should not rule out this might prove to be the straw that finally breaks the camel’s back. Of course, I could be wrong.

Nevertheless, I see no reason at all to change my preference of remaining “off risk.”

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The unexpected death of North Korean leader Kim Jong-il is the last thing the world and the markets need as it will add more uncertainty to a world that is awash with uncertainties. One thing that seems clear is that Kim's youngest son, Kim Jong-un, who is in his late 20s...
Monday, 19 December 2011 09:55 AM
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