Archív značiek: cyprus

China Hides Data

We had two announcements of central banks in the Europe. First was Bank of England with a new boss Mr. Carney. Second was ECB. The Bank of England mentioned that forward guidance and intermediate thresholds would likely be considered at the August assessment which means some change of monetary policy but otherwise there were no changes and the BoE kept rates and QE program unchanged. The Governing Council of the ECB expects that the key ECB interest rates remain at present or lower levels for an (not exactly specified) extended period of time. As you see the same story we heard from Mr. Carney. It is expected that rates will stay low or will be lower at least for 12 month. We have witnessed here some change of the policy of the ECB because it refused to pre-commit anything about rates in the past. This could lead to some currency wars regime between Europe and USA because FED is allegedly considering tightening its monetary policy. But FED could be forced not the change its policy because of actions of ECB and BoE due to the fact that Euro could weaken compared to US dollar which would be negative for the US export activities.

The ECB decided last week that Cyprus’s government bonds are temporarily ineligible as collateral after country´ credit rating was cut by Fitch Ratings and Standard & Poor’s. The central bank said it will reassess the potential eligibility of Cypriot marketable debt instruments upon the conclusion of the bond exchange.

Greece has to reassure Troika that it can deliver on conditions attached to its bailout in order to receive its next tranche of aid in August worth of € 8.1 billion. Greece missed a term placing 12,500 state workers into a „mobility scheme“, under which they are transferred or dismissed within a year to plug a fiscal gap. This could cause that IMF might stop its support to avoid of violating its own rules. But I would not be so afraid that the tranche will not come because we have German election in less than 3 month and Germans are eager to avoid any talk about yet another debt haircut for ailing Greece. Indeed, German Finance Minister Wolfgang Schäuble ruled out such a possibility just last week. Tensions over bailout terms have also mounted in Portugal. Finance Minister Vitor Gaspar resigned on Monday due to the protests against austerity programs. But it is more than obvious that any delays of austerity program will push Portugal towards some sort of further assistance or some form of debt restructuring. Who know maybe we will see finally how the OMT will work and what are its exact rules.

Europeans are furious by revelations that U.S. spied on EU representations in Washington and New York. Some have called for a suspension of talks on the trans-Atlantic free trade agreement. The documents indicate the US intelligence service was more active in Germany than in any other country in the European Union. But tensions were calm very soon and France and Germany have backed down on threats to suspend US trade talks once US promised to create more groups which will deal with the data protection.

china_hidingSo will it be China which trigger a new global economic problem or not? Difficult to tell but there are coming still interesting news from China. China suspended the release of industry-specific data from a monthly survey of manufacturing purchasing managers last week. So it seems that China is not only manipulating economic data it starts not releasing them. China´s shadow banking reached $ 6 trillion or 69 % of country GDP and regular banks works as intermediaries within the system. E.g. last month many wealthy Chinese received text message promoting 6 % return (far above official rate 3.3 %) on special financial product with 90 day duration. The problem with the shadow banking in China is that almost nobody knows where money is invested and some are wondering if these products are not some kind of Ponzi scheme.

Non-farm payroll data were released on Friday which were + 195 000, more than expected; the unemployment rate stayed at 7.6% despite expectations of a drop to 7.5%. Prior to this report ADP private payrolls data were released which were positive as well. During the month of June, the U.S. private sector added 188,000 jobs, driven by gains across all sizes of businesses, and with small companies showing the largest overall monthly increase. So far good news? It would be if full time jobs were not down by 240 K and part time jobs were not up by 360 K. But what do they cause? Will the FED change its policy? My bet is that there will not change but only time tells us.


Matúš Pošvanc

Power of Central Banks Moved By Markets

Mario Draghi verbally intervened once again and does not hesitate to tell anything. He said that the ECB is considering further non-standard monetary policy tools and will deploy them if circumstances warrant. He is also aware of the fact that the measures could have unintended consequences but the ECB will be allegedly able to manage them appropriately. He also said that the banking union and supervision of the ECB over the main banks within Eurozone could be one of solutions. But the banking union according to some other sources will not be able operate earlier than at the end of 2014. Important point is that it cannot prevent any crisis because problems within the banking sectors are not coming, they are already here. One of many examples could be the Deutsche Bank which is allegedly horrible undercapitalized according to a top U.S. banking regulator Thomas Hoeing. The Deutsche Bank CEO said that everything is ok and that the bank had made enormous progress on its core tier-one capital ratio. He said that the DB is the one of the best capitalized banks in the world compared to its peers after capital raise of almost 5 billion euros. So if this bank is one of the best capitalized compared to others and it is true at the same time that it is in fact undercapitalized than what the situation in other banks looks like? And European Union finance ministers were dealing about the set of rules for assigning losses when banks fail on Friday. The new rules should set standards for how to prop up or shut down failing banks, along with requirements for the kind of backstops each country must have in place. We will see what they deliver to us.

draghi_bernankeEuropean car sales fell to a 20-year low in May 2013. The most hit car makers were PSA Peugeot Citroen (UG), Renault SA (RNO) and Fiat SpA (F) – reading France and Italy. Registrations dropped 5.9 percent to 1.08 million vehicles from 1.15 million a year earlier. According to analysts, the EU market will shrink by 29 percent from the pre-crisis peak, and may stagnate at that level quite a long. Main reasons behind are high youth unemployment and aging population and of course financial uncertainty connected with the crisis.

As predicted Cyprus economy is driven into a deeper recession, leading to a further rise in unemployment and making fiscal consolidation all the more difficult. Cyprus agreed on rules of rescue which will cause its long and painful death. According to some news Cypriot president beg for revision of the bailout package and easing of strong rules. He wrote: „I urge you to review the possibilities in order to determine a viable prospect for Cyprus and its people.“ We will hear for sure about the country in the future.

Some analysts have pointed to Japan as the next financial crisis trigger. But it could happen anywhere today; for example in China. It seems that counterparty mistrust among financial institutions reached extreme levels in China last week where so called Shibor, or the Shanghai Interbank Offered Rate, has been surging. The rate is simply a barometer of liquidity in the Chinese credit markets. The situation was probably dangerous because the PBOC had to intervene to calm the markets and provide liquidity. Fitch also warns about China´s credit bubble and problems with its shadow banking system. “There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signaling,” said Charlene Chu from the Fitch.

It was the FED´s press conference which was the most monitor event of the last week. And what are the highlights of Bernanke’s press conference? First job gains and housing has increased consumer confidence, second most Fed members are not in favor of agency debt, third monetary policy will continue to support the economic recovery, fourth bond purchases may “moderate” later this year, and finally bond purchases could end around the mid of 2014. But the fact is that the Federal Open Market Committee left the monthly pace of bond purchases unchanged at $85 billion. Tricky is that only the idea that the “drugs” will be taken away from the addicted economy suffices to generate a significant declining effect in almost all markets. No. No. There will be not be any end of this policy.

Matúš Pošvanc

New Definitions

jens_weidmannThe ECB cut basic rates last week to proceed with verbal interventions this week as well. Mario Draghi said that they are ready to cut interest rates again if needed and they will accommodate the policy to the data that arrives from the euro-area economy in the coming weeks. The Governing Council allegedly consider openly for the first time at the possibility of reducing the interest rate on the deposit facility to less than zero. It is very probable that they will consider new steps very soon because spring forecast of the European Commission is not very optimistic. Annual GDP growth this year is now forecast at -0.1% in the EU and at -0.4% in the euro area. The ECB is allegedly also considering buying bad loans from southern parts of Europe to relieve the pressure on banks in crisis-stricken countries. According to Die Welt the ECB is also discussing whether the bank could itself buy asset-backed securities which simply mean that it wants to put on the balance sheet some junk assets and will directly finance needs of new loans within problematic economies. And if you think that currency wars are not heating up you should be aware of the fact that the Reserve Bank of Australia cut its benchmark interest rate to a record low by a quarter percentage point to 2.75 percent. And who else join the club? The Bank of Korea unexpectedly cut its key interest rate to 2.5% from 2.75% probably as a reaction to monetary easing steps of the Bank of Japan and on Wednesday, the National Bank of Poland cut its key interest rate to 3% from 3.25% as a reaction to ECB measures we have written a week ago.

Unemployment in Greece hit a new record. The number of employed decreased by 270,766 persons on yearly base. Greek Statistical Bureau reported that February unemployment rose to a new record high of 27.0%, with the January number revised from 27.2% to 26.7%. The unemployment rate among youth is 64.2 % which is a new record as well.

Do you still believe that Cyprus was an extraordinary case? And do you still believe that nothing like a Cypriot nationalization is possible within other European countries? According to a proposal of the European Council deposits over €100,000 are likely to be hit in the event of future possible European bank collapses. Uninsured deposits of over €100,000 would be bailed in if the bank is in troubles. Good news is that depositors would rank at the end of the process, with other creditors first absorbing losses.

It is more than interesting that while Italian sovereign bond spreads are back to near pre-crisis levels their delinquent loans re-accelerate once again. More than € 130 billion of Italian debt is currently delinquent and the current percentage of loans in default is approaching 8% of the total. It is more than interesting because everything is fixed in Europe, isn´t it.

The euro skeptical party „Alternative for Germany“ was officially founded just a few weeks ago. But it already has more than 10,476 members and some 2,800 of which have switched allegiance from Germany’s established parties. The party lures members by slogan: „Straight talk instead of S€datives“. Its support is still around 4 % which is under 5 % quorum needed to enter the federal parliament.

French Finance Minister Pierre Moscovici declared that the era of austerity is over and that austerity is not the only way to fight the European crisis. Finance Minister Schaeuble agreed that some euro states (among them France) need more time to reduce their budget deficits. Different opinion has his counterpart in the Bundesbank Jens Weidmann who said that „You can’t call that savings, as far as I am concerned … To win back trust, we can’t just establish rules and then promise to fulfill them at some point in the future. They have to be filled with life…“. I think that not only Mr. Weidmann but all of us should have to get accustomed with a new definition of rules that there are no rules once we are talking about cutting of social spending.

There are still more doubts about the China´ GDP growth and future development of country. Private and public debt is estimated over 250 % of GDP and the US diplomatic cable released on WikiLeaks revealed that Chinese GDP statistics are „man-made“ and are not consistent with electricity use, rail cargo, and bank loans. More and more experts expect that China’s miraculous growth is over and will decline to 6 % by 2020 and maybe lower (3-4%) due to the ageing crisis. China’s ageing crisis is tracking Japan’s tale with a 20-year delay.

International Monetary Fund head Christine Lagarde said the U.S. government’s debt reduction plans are too abrupt which could cause that the U.S. economy would be contracting by over one and a half per cent. Not very good perspective if you realize that the US needs real and healthy growth more than ever. We have to realize that although stock indexes reached new times records the month April was the 195th straight month that the number of American workers collecting federal disability payments increased; in nominal terms it means 10,962,532 which are more than population of Greece. Yes. This is a new definition of healthy growth.

Matúš Pošvanc

ECB Confirmed Recession

draghi bratislavaAt Bratislava´s meeting the Governing Council of the ECB rewrote the monetary history of Eurozone. Council decided to lower basic interest rates to 0.5 % starting from May 8th 2013. It is nothing else just a confirmation that nothing was solved within the Eurozone. Otherwise they would raise rates. Mario Draghi press conference looked like a communist party meeting once he celebrated a new release of 5 euro bank note with happy children and he stated that ECB is prepared to use negative interest rates for bank deposits if necessary to stipulate velocity of money but insisted that the economy would recover later this year as many times. The move was somehow expected because it comes on the heels of dismal economic indicators. In recent months, economic confidence has worsened and unemployment has risen over 12 percent across the currency zone. But the real problem is youth unemployment. French youth unemployment has risen for 13 months in a row to a record 26.5%; Spain is at 57.2% and Greece’s is a stunning 59.1%. Other candidates for records are Italy and Portugal with 38.4%. Even the German economy showed signs of weakening. So something was necessary to do to stipulate the economy. But easier credit just stipulates projects which need not be sustainable and without new stipulations will cause more problems in the future. There is nothing like a free lunch.

Spain fell deeper into recession in the first three months of the year. The data showed that Spain’s gross domestic product contracted 0.5 percent in the first quarter from the last three months of 2012, mainly because of sliding domestic demand. One of the most significant problems for the economy is housing market. Standard and Poor’s warned that Spanish house prices are to fall a further 13pc by the end of next year which means only more problems to their banking sector and claims for more help from other EU member states. The agency is warning that the housing slump is deepening across the Eurozone and Netherland and France are next countries with troubles. French declines are “gaining momentum”, with prices likely to fall 5pc this year and a further 5pc in 2014, agency said.

According to France labor ministry the number of unemployed jobseekers hit 3.224 million which means a new record. March was the 23rd consecutive month of rising unemployment in the country. The ministry did not provide a current unemployment rate, but said it was at 10.2 percent at the end of 2012 and remained below the 10.8 percent record set in 1997.

And do you still think that Cypriot nationalization of bank accounts over € 100,000 by rate of 90 % was something exceptionally? If so, you could be interested that the Spanish government started to require from any resident with an overseas asset worth more than €50,000 and who lives in Spain at least six months (183 days) of the year to declare what they own abroad. As relatively few Spaniards have assets outside of Spain most affected will be British pensioners and retirees. They are required to declare UK bank account numbers, mortgages and other details under the threat of €10,000 penalty.

Greece is finally forced to make some reforms to transform their unsustainable welfare state. 15,000 state employees lose their jobs in Greece as the Greek parliament passed a new law which overturns what had been a constitutional guarantee for civil servants of a job for life. Some 2,000 civil servants will lose their jobs by the end of June, another 2,000 by the end of the year, and a further 11,000 by the end of 2014.

FED will not change its policy as we emphasize for a few weeks and will continue with $85 billion a month asset purchasing program. The main reason behind is still a weak economic growth. Chicago PMI hit 49 which indicates that expectations about economy are not good and it seems that nobody told the respondents that the economy is recovering. The central bank’s balance sheet has ballooned to more than $3.3 trillion and it is planned to be $ 4 trillion at the end of this year. If you want to understand some monetary language you could try to puzzle out this statement „The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes“. Good luck.

Matúš Pošvanc

Euro Will End in 5 Years

barrosoEuropean Commission President Barroso started to criticize the austerity measures that the EU has imposed on the mainly Southern European members states in economic crisis. He stated that while the policy may be „fundamentally right,“ it had „reached its limits.“ In the short-term, „a stronger emphasis on growth“ is needed. Look at the beauty of political sentences – the policy is fundamentally right but not now; somewhere in the brighter future.

Spanish Prime Minister Mariano Rajoy probably anticipated Mr. Barroso´s opinions because he has already called for a two-year extension to meet European Union deficit rules. Reasons behind are lower growth forecast and a record 27 percent unemployment rate. Spain budget deficit hit a record level of 10.6 percent of gross domestic product but the government still promise that it will be within the EU limit of 3 percent by 2016. Yes, we “believe”. Spanish 10 Y bonds are record low on yearly basis and hit 4.3 % at the end of the week. So investors and borrowers really believe. Comments are not needed. And austerity measures are not popular among public as well. Spain and Portugal had massive anti-austerity protests last week. Yes, once again. This is another reason why there are only two possible outcomes from this state. One is inflation and more public spending and second is that people realize that their dreaming should be over. And the first is more probable.

How long will Euro last? Up to 5 years; it is not mine opinion but senior German government advisor´s. He stated last week that Euro has a limited chance of survival and 5 years sound realistic. The German government’s official line is opposite; at least for now.

Greece will receive another € 8.8 billion installment of the bailout package from the Troika. The condition of the installment is that Greece will privatize as much state owned assets as possible. They are prepared to sell more than 70,000 lots, ranging from pristine stretches of coast through to royal palaces, marinas, thermal baths, ski resorts and entire islands. To sell some attractive property would not be so difficult but it will be more difficult to find some investors for loss-making behemoths like the Hellenic Railways Network and the Public Power Corporation. Why? Both of them have militant unions.

The debt of the US has reached almost 105 % of its GDP to rise from 103 % in December 2012; it means $ 16,774 billion in nominal terms. The GDP numbers from the US economy disappointed markets once the expectations were at 3 % and real output was only 2.5 % in first quarter of 2013.

Some people (especially investors) still hope that the FED has some kind of exit strategy how to decrease its more than $3 trillion bond portfolio which was created just within a few years by buying American bonds to hold rates of debt on sustainable levels. But the strategy is so secret that it seems to some skeptics that it does not exist. This skepticism is supported by the latest news. Two House Republicans are frustrated at the lack of response to a February request demanding more details on the central bank’s strategy to unwind assets purchased during years of its easy-money stimulus programs. “The American people have a right to know the true risks associated with the expansion of the Federal Reserve’s balance sheet,” the lawmakers wrote in a letter dated April 22. Response from FED? Mysterious silence or political answers. And how a typical political answer looks like? We are able to give you a lecture how to answer a simple question; for example: “How much is inflation in Argentina?” To understand Spanish is helpful but not required:

Matúš Pošvanc