On Saturday, Brad Setser, following Peter Garnham, made the very important point that while the big countries’ central banks have each others’ backs, emerging-market countries are being left out in the cold.
For all the talk about how the G-7 has lost relevance, in a lot of ways the recent crisis has reinforced the G-7’s importance. Banks in G-7 countries that borrowed in dollars have access to unlimited dollar financing from their central banks – dollar financing that comes from the fact that the main G-7 central banks have access to large swap lines with the Fed.
Banks in emerging market countries have no such luck.
The result is economic chaos around the world: no one, it seems, is immune to the crisis which started in the US housing sector but which is now truly global in nature. Korea, Hungary, Ukraine, Pakistan, Russia, Kazakhstan — name the country, there’s probably a banking crisis there. And then, of course, there’s Iceland.
So I’m very puzzled by Dan Gross’s column in Slate, saying that a bunch of countries without Starbucks seem to have been "safe havens". He says that Spain, with 48 Starbucks in Madrid alone, is "grappling with the bursting of a speculative coastal real-estate bubble", in contrast to Brazil, which has only 14 Starbucks for the entire country.
Italy hasn’t suffered any major bank failures in part because its banking sector isn’t very active on the international scene. The number of Starbucks there? Zero. And the small countries of Northern Europe, whose banking systems have been largely spared, are largely Starbucks-free.
In what conceivable way can it be said that Brazil, Italy, and smaller Northern European nations have fared better than Spain in this crisis? Spain’s banks are well-regulated beacons of strength; the same can hardly be said of the big Brazilian banks — overburdened by loans to agriculture and commodity companies — or of entities like Unicredit or Fortis.
Maybe it’s unfair to call out Gross for describing Argentina as "a pocket of relative strength" just as its president decides to nationalize the country’s pension system, sending its stock market reeling. But Brazilian stocks have underperformed US stocks over the past few months, and its banks are no exception; Fortis, of course, ended up being nationalized.
Meanwhile, Spain’s Santander, which had an option to buy the 76% of Sovereign Bank that it didn’t already own at $38 per share, opportunistically swept in to buy it up at $3.81 a share instead. And then of course there’s Japan — full of Starbucks, but one of the few countries without a banking crisis.
But never mind Gross’s Starbucks conceit — does he have a bigger point?
Having a significant Starbucks presence is a pretty significant indicator of the degree of connectedness to the form of highly caffeinated, free-spending capitalism that got us into this mess. It’s also a sign of a culture’s willingness to abandon traditional norms and ways of doing business (virtually all the countries in which Starbucks has established beachheads have their own venerable coffee-house traditions) in favor of fast-moving American ones.
Nice idea, but it’s not true. Look at Germany: those stodgy, Starbucks-free, slow-to-spend capitalists have the largest banking-sector bailout of all.
And more generally, this is no replay of the dot-com crash, where investors in high-flying earnings-free technology stocks suddenly found themselves running on air. The biggest losses this time round haven’t been in high-risk assets: they’ve been in instruments which carried triple-A credit ratings and which were meant to be very low risk.
This is an equal-opportunity crisis: it’s hit rich countries and poor ones, importers and exporters, ultracapitalist risk-takers and boring state-owned savings institutions. Just about the only places relatively unscathed are the poorest of the poor, the bottom billion, who are seeing global food prices come down from starvation-inducing levels — the people who don’t have any savings to lose.