Saturday, 29 January 2011

The acceleration in the deterioration of Sovereign Credit - The impact of youth unemployment and the jobless recovery.

"As we peer into society's future, we -- you and I, and our government -- must avoid the impulse to live only for today, plundering for our own ease and convenience the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow."
Dwight D. Eisenhower.
Farewell Adress - 17th of January 1961

Interesting Regression Analysis - as displayed by M&G Investments:

The issue is clear, youth unemployment is very high in peripheral countries in Europe. The danger being, the higher the rate of unemployment, the higher the risk for social unrest linked to the deterioration of Sovereign Credit, the slower the economic growth:

European map displaying Youth Unemployment Rates for 2009:

As the below graphs, shows, there is clearly a divide in Europe and the speed of the economic growth is impaired for many countries, such as Italy and France due to the very high level of unemployment for youths. Italy and France are in the danger zone clearly. They are already above the European average rate for youths unemployment rate. It does not bode well for the economic growth of the countries above the average. Structural reforms are urgently needed. Spain cannot delay any longer structural reforms of its very inefficient labor market.

The performance of labor markets generally reflects the performance of the economy as a whole.

Germany is powering ahead, with its very low youth unemployment level:

It is very important to look at the impact of youth unemployment in the light of recent events in Tunisia and now Egypt. There is a direct correlation to these events. It does not bode well for other countries facing similar youth unemployment levels, in the table below you can see the levels of the youth unemployment rates in 2001:

Youth unemployment clearly plays for a large part in the social unrest we have recently witnessed in Tunisia and now Egypt.

"Muslim-majority countries in North Africa and the Middle East have the highest percentage of young people in the world, with 60 percent of the regions' people under 30, according to study by the Pew Forum on Religion and Public Life."

The arabic countries have a growing youth population:

CDS spreads for North African and Middle-East are widening due to the contagion from Tunisia (October 2010 until End of January 2011):

North African Middle-East CDS OCT10-JAN11 - Egypt, Lebanon, Tunisia, Morocco:

Sovereign Wideners for the 28th of January 2011 - CMA's Sovereign CDS data:

Egypt's cumulated probability of defaults now stands at 24%, above Spain which stands currently at 21% according to CMA.

Are young arabs satisfied with efforts to increase the number of quality jobs? (Gallup survey April 2009)

The jobless recovery:
During the recent crisis, youth unemployment has surged dramatically. The jobless recovery is a serious obstacle to the reduction of youth unemployment and rapid economic growth:

"EU Employment Commissioner László Andor has admitted that the EU is experiencing a "jobless recovery", amid warnings from the International Labour Organisation (ILO) that the situation might not improve this year."

"More than 23 million workers are currently registered as unemployed across the whole of the EU. This means that the number of job seekers has increased by 46% (some 7.3 million people) since March 2008.

Europe's young people are facing an especially difficult situation. Across the EU as a whole, the youth unemployment rate, for those under 25 years of age who are not in full-time education, is now at a record level of 21%."

"Young people in Spain face an especially difficult challenge in trying to find work, as more than 43% of young people under the age of 25 (not counting those in full-time education) are registered as unemployed."

"It is key that reforms are undertaken to reduce the rigidity that characterises many European labour markets. Flexibility is crucial in times of recovery in order to promote job creation," BusinessEurope declared.

For those of you who would like to go through the latest report on the Global Employment Trends for 2011, the International Labor Organization (ILO) report is available at the following address:

The jobless recovery is typical of a balance sheet recession.

In the US, unemployment among people under 25 with bachelor’s degrees reached 9.6% in December, up from 8.6% in November and 5.9% just two years earlier. A stagnant labor market means the USA cannot create enough jobs for the thousands of young people set to graduate in 2011.

Are we going to witness a major conflict between generations? We were warned by Dwight D. Eisenhower in his prescient Farewell Address delivered 50 years ago on the 17th of January 1961, a must read...

"Crises there will continue to be. In meeting them, whether foreign or domestic, great or small, there is a recurring temptation to feel that some spectacular and costly action could become the miraculous solution to all current difficulties."
What would Dwight D. Eisenhower have thought about Bernanke's QE2, about TARP, about Alan Greenspan?

In his great farewell speech Dwight D. Eisenhower also added:
"But each proposal must be weighed in the light of a broader consideration: the need to maintain balance in and among national programs, balance between the private and the public economy, balance between the cost and hoped for advantages, balance between the clearly necessary and the comfortably desirable, balance between our essential requirements as a nation and the duties imposed by the nation upon the individual, balance between actions of the moment and the national welfare of the future. Good judgment seeks balance and progress. Lack of it eventually finds imbalance and frustration. The record of many decades stands as proof that our people and their Government have, in the main, understood these truths and have responded to them well, in the face of threat and stress."

Dwight D. Eisenhower's wisdom was clearly not taken onboard. He would have been deeply shocked by the Financial Crisis Inquiry Report
and its conclusions but that's another matter...

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