Honda's troubles

Civic unrest

Japan’s crisis hits Honda but it is not bad news for

all in the motor trade
Apr 28th 2011 | NEW YORK | from the print edition

An image that needs a bit of a polish

A CRUCIAL product launch for Honda may be in jeopardy as the carmaker struggles in the
wake of Japan’s disaster. An updated version of the company’s bestselling Civic range has
just made its first appearance in America at the New York Auto Show—but it is unclear how
quickly motorists impressed by its curves will be able to take delivery of one.

Not only were Honda’s Japanese plants shut for much of the past month but production has
been sharply curtailed at its factories in America and elsewhere, because of shortages of
Japanese-made electronic chips and other parts. “The situation is very fluid”, frets John
Mendel, the company’s top American executive, “and changes day-to-day.” Toyota and
Nissan have told their American dealers that deliveries of cars will not be back to normal
until July at best, maybe September.

At this late date Honda cannot postpone the Civic’s launch, as Toyota has done with several
models, including the new Prius V hybrid and the American version of its iQ minicar. But the
alternative, stretching out its introduction, also poses risks, says Art Spinella, of CNW
Marketing Research, an auto consultancy. The longer buyers have to wait, the more likely
they are to look at rivals’ models. That might not have been much of a worry a few years ago,
Mr Spinella adds, but Honda is facing a much stronger product assault from American
manufacturers—such as Ford, which is soon to launch a revamped Focus—as well as
Hyundai of South Korea.

A loss of momentum in America would be especially worrying for Honda, which has long
earned a large chunk of its profits there. On April 28th it announced a 38% year-on-year fall
in first-quarter profits because of earthquake-related production cuts and weak sales.

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Mainstream models like the Civic and Accord are selling well but some of Honda’s niche
models, such as the ZDX, sold under its Acura luxury marque, and the Insight, a hybrid-
electric car, have disappointed, says Joe Phillippi of AutoTrends Consulting.

Worldwide, Honda is struggling to recover from a disappointing year. Its 2010 sales grew by
a modest 5%, compared with 22% at Nissan, which overtook Honda to become the number
two Japanese carmaker. A weak launch of the new Civic clearly will not help. So no one will
be surprised if Honda diverts components from other models to the subcompact’s assembly
lines, especially in America. The next few months will be tough, but giving the Civic a
decent debut would at least help shore up the brand.

The disruption caused by Japan’s quake, tsunami and power shortages is spreading far and
wide among carmakers: one of the affected plants normally supplies a key microchip for
around 40% of all new cars in the world. Even so, the crisis is an opportunity for some. The
resulting shortage of new cars is driving up the prices of those models that are readily
available—such as Ford’s Focus—and of secondhand cars. Reductions in the big discounts
Ford had been offering on some models were a factor in the bumper $2.6 billion of quarterly
profits the company announced this week.

from the print edition | Business

Poland
A place at the top table

Poland is flourishing. But to be remembered as a

great leader, Donald Tusk needs more ambition
Apr 28th 2011 | from the print edition

GOOD fortune and Poland are rarely coupled. But the biggest of the European Union’s
newish members now has something to celebrate. It survived the financial crisis with barely a
blip—its economy even grew in 2009 when most others shrank (see article). It is the
unquestioned diplomatic and economic heavyweight of its region. In July it takes over the
rotating presidency of the EU. And in October Donald Tusk is set to become the first prime

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minister in Poland’s history to win re-election after a full term in office, bestriding a political
landscape that is pleasingly normal (see article).

The beatification of Pope John Paul II this weekend is a reminder of the role of that great
Pole, and of his homeland, in toppling communism. Other, less pleasant ghosts of the past are
fading. People no longer equate Poland with the tantrums, paranoia and idiosyncrasies of the
government led by Jaroslaw Kaczynski. Still less do they associate the country with chaos
and backwardness, or with futile wartime heroics. Ties with Russia and Germany, the two
historic menaces, have never been better.

Yet Poland must raise its game to regain its rightful place at Europe’s top table. That must
start with the economy, which despite a good recent run still exhibits ominous weaknesses.
Mr Tusk must get a grip on the public finances. A big budget deficit (7.9% last year) may
have helped in the downturn, but it now reflects fiscal incontinence. Poland musters a paltry
0.7% of GDP for research and development, half the Czech level (the EU target is 3%). If Mr
Tusk can dump his coalition partner, the smallholders’ People’s Party, he will find it easier to
prune wasteful subsidies for farmers. He also needs to deal with the inherited plague of early
retirement, which gobbles cash and wastes talent. Unemployment remains high, and a
shocking 1.5m Poles of working age are not economically active.

All Polish governments promise reform, but few keep their word. Mr Tusk’s government has
done well in flattening taxes—but Poland still scores shamefully badly in the World Bank’s
ranking of ease of paying them, at 121st place, behind Russia. In an index of business-
friendliness, Poland is in 70th place, worse than its autocratic and backward neighbour,
Belarus. Poland’s entrepreneurs have wrought marvels in these hostile conditions. They
would do much better in a system that allowed them to unleash their talents fully.

Mr Tusk’s government could do more abroad, too. The “reset” of relations with Russia has
been a success, but Poland’s relations with its smaller neighbours like Lithuania are too often
scratchy. The government has been feeble over north Africa. Mr Tusk says he wants to
provide humanitarian aid and political advice. But the excess of waffle and the lack of
specifics stand out in contrast with Poland’s ready support for the missions in Iraq and
Afghanistan. This comes oddly from a country that advocates a stronger EU foreign and
security policy.

More ambition, please

The common factor behind Poland’s sluggishness over economic reform and its excessive
caution abroad is a lack of ambition. Since his first bid for power in 2005 Mr Tusk has come
a long way. He has gained authority in his own party, Civic Platform, which has trounced its
opponents at every turn. Never in Poland’s troubled history has a leader been better placed to
realise his country’s true potential. But, having secured power, Mr Tusk has done only half
the job.

from the print edition | Leaders

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Greenhouse gases

The cost of trade

Apr 26th 2011, 17:30 by The Economist online

Rich countries are outsourcing carbon-dioxide emissions

WHEN a country reports its carbon emissions to the United Nations, it is the carbon dioxide
that goes out of chimneys, exhaust pipes and forest fires of the country’s own territory that
gets counted. But what about the carbon emitted elsewhere by people making goods that the
country imports? A paper just published in PNAS by Glen Peters and colleagues looks at how
the world’s carbon emissions get reapportioned when the carbon used to make traded goods
and services is charged against the account of the ultimate consumer, not the initial producer.
So while Europe may pride itself on emitting less carbon from its own territory than it did in
1990, from a consumption point of view the carbon embodied in imports from China alone all
but cancels out the gain. In general the study finds that net embodied carbon imports into
developed countries grew from 400m tonnes in 1990 to 1.6 billion tonnes in 2008—a growth
rate faster than that of the world economy or global carbon emissions. 

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Europe's debt crisis

The limits of austerity

Apr 26th 2011, 14:38 by R.A. | WASHINGTON

THIS is what insolvency looks like:

Greece's budget deficit in 2010 was 10.5% of gross domestic product, significantly larger
than forecast by either the Greek government or the European Union authorities, Eurostat, the
EU's official statistics agency, said Tuesday.

Lower-than-expected government revenue was the main culprit behind the higher deficit
number. Greece has struggled to meet its goals for tax revenue under the rescue program
overseen by the EU and the International Monetary Fund since last May. Economic growth
has fallen short of forecasts, while the government has faced problems cracking down on tax
evasion...

The missed target was "mainly the result of the deeper-than-anticipated recession of the
Greek economy that affected tax revenue and social security contributions," the Greek
government said in a statement after the Eurostat announcement.

The new deficit figure will add further pressure on Greece to raise taxes and cut spending this
year to meet its targets. But there are fears that more cuts could deepen the Greek recession.
Belgian finance minister Didier Reynders said earlier this month that Greece should be given
more time to cut its deficit to limit damage to the Greek economy.

Greece has a lot of debt to service and a big budget deficit. To stabilise its massive debt and
begin paying it down, it needs to be running surpluses. But to run surpluses, it must cut
spending and raise more revenue. These policy adjustments have kept Greece in a deep
recession that has limited the extent to which the adjustments have yielded actual deficit
improvements. Further cuts might help, but markets long ago lost confidence that there is a
politically achievable level of austerity sufficient to deliver the necessary Greek surpluses. So
Greece is effectively shut out of debt markets. The yield on 10-year Greek government debt
is over 15%, and the 2-year yield is over 24%.

There are two ways forward. The euro zone could simply fund Greece on an ongoing basis.
But in practice, a debt restructuring is the only really likely outcome here. The immediate
question is how the European Union and the IMF will handle it.

The broader question is the extent to which markets will locate other countries in this same
insolvency trap. Ireland and Portugal are probably there. Spain probably isn't. But markets
will be watching these others closely to see if austerity effectively closes current budget gaps.

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The euro area's debt crisis
Latin lessons

There is a model for how to restructure Greece’s

debts
Apr 20th 2011 | from the print edition

AT FIRST sight, Greece’s debt crisis has taken another turn for the worse. Yields on its
government bonds have soared, rising above 20% on two-year paper on April 18th. But what
seems to be bad news may in fact be good.

Greek bond yields are spiking because European policymakers now seem to be
acknowledging what this newspaper has long argued was inevitable: Greece’s debt will need
to be restructured. Even Wolfgang Schäuble, Germany’s finance minister, appears to be open
to the idea. The official line, admittedly, remains that restructuring is not an option; and the
European Central Bank still has its head firmly in the sand. But the debate in Europe is finally
shifting from how to avoid a Greek restructuring to how to do it (see article).

This is to be welcomed—but with a reservation: even as Europe’s leaders start to consider

restructuring, there are worrying signs that they will shrink from doing it boldly enough. That
is because the continent’s politicians are not chiefly motivated by the desire to cut Greece’s
debt burden to a sustainable level. The Germans, in particular, have two concerns closer to
home. The first is to minimise Greece’s need for more cash from German taxpayers: the
current plan is for Greece to return to the markets next year, which is plainly implausible. The
second is to protect German banks, many of which hold Greek bonds, which makes them
reluctant to accept any debt write-down. These two concerns point to a modest “reprofiling”,
which temporarily defers Greece’s debt payments but does not come close to restoring its
solvency. Realisation would merely be postponed.

Follow Brady, not Baker

The debate about Greece now has a Latin American dimension. Those who favour deferral
point to Uruguay. In 2003 the small Latin American country convinced its creditors to swap
their bonds for new ones with the same principal, same interest rates and five years’ longer
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maturity. That reduced the effective burden of the South American country’s debt by around
15% at little cost: soon afterwards it was borrowing again in international markets. Greece,
goes the hope in Berlin, could do the same. Putting off bond repayments for a few years
would mean that the official rescue funds would last longer. You could lean on financial
regulators to allow Europe’s banks to continue valuing their bonds at par.

The trouble is that Greece in 2011 is not Uruguay in 2003. Greece’s debt stock, set to reach
160% of GDP in 2012, is almost twice as high as Uruguay’s was. Greece is unlikely to enjoy
a fortunate run of strong economic growth, as Uruguay has, clocking up a rate of 6.1% a year
thanks to the global commodity boom. Modest reprofiling will not, therefore, put Greece’s
public finances onto a sustainable footing. At best it will buy time. A deeper reduction, not
deferral, is needed.

A more accurate and worrying Latin American parallel is the debt crises of the 1980s. Greece
is bust, just as Mexico (followed by several others) was in 1982. The exposure of America’s
big banks to Latin America was enormous; formal write-downs of debt would have left many
of them insolvent. A plan named after James Baker, then America’s treasury secretary,
offered the Latin Americans a temporary rescheduling (similar in spirit to the sort of scheme
being discussed for the Greeks today). It gave the American banks more time to recover, but
Latin America’s economies buckled under the burden of debts that could not be repaid. In
1989 another plan, named after another treasury secretary, Nicholas Brady, provided the
necessary debt reduction. But Latin America lost a decade. In 1992 income per person was
still lower than ten years before.

Greece needs a Brady plan, not a Baker one. Such a restructuring would hurt some European
banks, especially Greek ones, which would need extra official help. Overall the hit to
Europe’s banks is manageable, and it is far better to push them to boost their capital than to
pretend unpayable debt is whole. None of this will be easy to sell to voters (Finnish ones
vented their anger this week—see article). But the longer that politicians lie to them about
reality, the angrier they will get.

The reality is that Greece’s debt burden needs to fall by at least half. European officials could
offer a menu of ways to achieve that: reducing the principal owed, cutting interest rates or
radically lengthening maturities. They could sweeten the terms with guarantees, as the Brady
bonds did, and offer investors a share in any Greek recovery with warrants related to the
country’s future economic growth. The interest rates on new official loans might also be
made contingent on growth rates. There are creative ways to make default less painful; trying
to pretend it will not happen is not one of them.

from the print edition | Leaders

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Gold reserves

Bullion for you

Apr 27th 2011, 16:15 by The Economist online

Where the world's gold is held

THE creditworthiness of a country used to be judged by the level of its gold reserves. Under
the gold standard, a fall in reserves would lead to the central bank taking crisis measures. The
country with the biggest reserves in the world is, not surprisingly, America, with 8,134
tonnes. But expressed in terms of reserves per person, the picture looks very different. It is no
surprise to see Switzerland at the top of the list, but why is Lebanon in second place? Its
reserves were purchased when the country was the Middle East’s financial centre in the
1960s and 1970s and safeguarded through the civil war years by legal restrictions and by
central-bank governor Edmond Naim, who according to legend slept in the bank to protect
the hoard. China does not feature in the list at all; but gold bugs fantasise about what might
happen if the people’s republic were to swap just some of its mountain of Treasury bonds for
bullion.