Archív značiek: debt

Barroso has declared victory

It was the week of central banks announcements. But frankly speaking nothing new has happened. ECB let rates unchanged and so to say the Bank of England.  Mario Draghi admitted that euro area growth is still under question and that we may expect prolonged period of low inflation. This brings us back to the question what kind of arms ECB will use in the future concerning inflation, support of economy and backing the back of some sovereign nations as Spain, Italy or Portugal which experiencing low rates on their sovereign bonds.

Unemployment of the Eurozone remains unchanged at 12.1 % as expected. The lowest rates are in Austria (4.8%), Germany (5.2%) and Luxembourg (6.1%), and the highest in Greece (27.4% in September 2013) and Spain (26.7%). The only surprise is that Spain youth unemployment is (probably because statistics from Greece are delayed) higher than Greece one and is at stunning 57.7%.

Thanks to God, José Barroso has declared victory again. The European Commission chief told that the eurozone crisis is finally over. Ireland has exited from rescue program and Latvia has joined the euro and is now the EU’s fastest growing country. Brisk future is before us. baroso

This is not the case for France. Their attempt to introduce 75 % tax was approved by constitutional court. But country is facing many problems caused by very extensive social policies. One example. Two managers of Goodyear Tire Company were captured by unions’ workers for more than 30 hours because union workers did not agree with the closure of the ineffective company. French workers have a history of holding managers captive. Companies including, 3M, Sony and Caterpillar were affected in 2009 as well. Generally workers have not been prosecuted for holding their bosses captive and according to the CGT union, the “two managers have been given water and still have their mobile phones”.

It seems that China Banking Regulatory Commission is full aware of the threats of shadow banking system which is estimated as 69 % of GDP of the country in 2012. China’s banking regulator told lenders to publish data including off-balance-sheet assets and interbank liabilities. Lenders with total assets of $264 billion or more must publish 12 indicators within four months of the end of each financial year. To watch China in 2014 will be worth of your time. Why? Because the new crisis trigger could come from this country.

Venezuela is experiencing tough times. It is 56 % official inflation rate in the country and government has introduced fixed prices for some products. The consequence of it is lack of everything. The story of an ordinary taxi driver of border town Maracaibo is very informative. He has to drive to Columbia to buy rise because he haven´t seen it in the shops since July. President Maduro solves problems with no food very clever. Maduro has urged citizens to abstain from “nervous buying” of imports, saying on state television Jan. 6 that “consumerism is an addiction that destroys the human being.” To be addict on food is a problem.

The most important but widely expected event from US was election of Janet Yellen as the first women president of the FED. Good by Ben and welcome Jannet but from the point of view of the policy of the FED has nothing changed apart from the fact that Yellen could be more pro stimulus oriented person as Bernanke. The minutes reveled that many FOMC members favored QE tapering in `measured steps‘ and most participants were more confident in job market gains. Job market showed us decline in unemployment from 7 to 6.7 % but the economy creates only 75 k jobs pretty below 200 k expectations and labor force participation rate is the lowest since 1978.

Financial and Natural Hurricanes

Haiya is the name for the biggest hurricane ever which was heading towards Filipinas this week. According to experts there is not almost nothing built on the Philippines that can withstand winds like that. We know natural disasters very well but do we heading into the some which are caused by men? Very probably yes. Monetary policies are the best example of these days’ potential catastrophes for human mankind. They are direct proof that nothing has changed since 2008. Otherwise we would have higher rates. As we wrote last week ECB finally cut the basic rates by 25 bps to historic lows and they will keep them unchanged for a longer period of time. The reasons behind were according to president Draghi low inflation expectations, risk of the growth remain downside as well as unemployment rate and ECB expects that Euro area will face prolonged period of low inflation if not deflation. The Bank of England unchanged its policy but surprisingly our brothers Czechs entered currency wars. Although CNB decided to keep interest rates unchanged it decides on interventions on the foreign exchange market to weaken the koruna so that the exchange rate of the koruna against the euro is hold close to CZK 27.huricane

“Today there is only one country and only one in command: Germany” said Romano Prodi last week. What Europe needs is according to him that ECB should fulfill its inflationary targets by 2 %. Prodi said that Italy is in trouble because of low inflation and that it is trapped in deflationary spiral. Italy has primary budget surplus but its debt to GDP ratio is still climbing due to the unsatisfactory nominal GDP growth. Prodi also urged for creation of “Latin front” against Germany. He claims that Germany is obsessed by low inflation as teenagers are obsessed by sex. There is nothing strange that some Italians claim for lowering of purchasing power of Euro. They did it with their currency before Euro all the time. But as we have emphasized many times these opinions are still stronger and I think that higher inflation times is slowly coming into the Europe; hopefully not end by the word “hyper”.

We had another whole country protests in Greece for 24 hours. Protests were taking place as Greece holds talks with its ‘troika’ of creditors. Labor unions were fear that politicians will impose another wage and pension cuts to meet the terms of the bailout and that they introduce more job cuts in the public sector, as well as privatization. But we are accustomed with these news and we will see more strikes in the near future. That is for sure.

China´s Premier Li Keqiang declared last week that China needs grow at least 7.2 percent annually to create 10 million jobs a year which is necessary for employment as one of the country´s priorities. His remarks were made at a union meeting two weeks ago but were only published in full this week, just days before a pivotal Communist Party plenum to set policy opens. He also warned on easy credit supply, which is about 100 trillion yuan ($16.4 trillion) what means that is already twice the size of China´s GDP. And new credit could cause inflation which is for Chines leaders’ dangerous game in one billion men country. Growth at the peace of 7.2 percent is quite ambitious plan because as we informed you many times China is suspicious to adjust official economic data. There is also news from time to time which supports this theory as for example the one from the last week. Chinese leaders called for stopping expanding industries such as steel and cement in which supply outstrips demand to cut overcapacity of these industries. And as data shows cement manufacturers use only 71.9 percent of their capacity from 2012 and the steel industry use only 72 percent. So as you can see the situation around the growth of GDP is at least cloudy. On the other hand everybody expects introduction of some reforms on their Third Plenum meeting in terms of industry deregulation, financial liberalization, and reforms to land titles, state-owned enterprises and social security. We will see what this meeting brings to the globe.

The most important data for this week from the US were non-farm payrolls. So October nonfarm payrolls soar to 204,000. It was a nearly double digit contrary to the expectations on 120,000. Unemployment rate in the US is at 7.3%, a little bit up from 7.2% in September. Does it mean that FED changes its policy in the near future? It is difficult to tell. But as the UBS warns FED is trapped. According to the UBS the Fed is facing two major risks. First is that premature tapering could disrupt markets and triggers global turmoil across all assets classes with consequence of weakening already weak economy. Second is that if FED delays tapering of its policy of 85 billion purchase program it will fuels creating of asset price bubbles, which could burst eventually and do major damage as well. So you can choose as usually what really happens. Maybe we will witness no tapering at all but increasing of QE. Who knows?

Matúš Pošvanc

Better tomorrows are not coming

What was not successful strategy in Germany was successful in Austria. For the first time a pure euro skeptic party founded by billionaire Frank Stronach will enter into the Austrian parliament, with 5.8 percent of total votes. It seems that euro skepticism is a one of the new political movement connected with the outcomes of join European project. This is not anything new for EU leaders. As during old socialist times the most important academics, policy-makers and politicians gathered in Brussels to discuss the future of EU. Actually, there were more pessimists than optimists. The pessimism was connected with economic stagnation, high young unemployment and so called lost decade. But we could see the same solutions and suggestions as in the last decade. Our main problem is not about political will and the ability of our political leaders to explain what they are trying to do but about too much regulations, indebtedness, high taxes and elimination of market forces.

We had ECB monetary decision this week but as accepted nothing happens. All basic rates remained at the same levels. The only surprise could come with some announcement of third round of LTRO but Mario Draghi did not mention anything like this. We also had a quite big frustration about the political activities in Rome but Silvio´s party finally supported present government and we could feel one big breathe from Brussels and ECB. Otherwise we could finally see what really means OMT mechanism from the EBC.  For now everything stayed calm.

During the summer period, France announced some economic growth. After that, new surprising information has appeared. It seems that the aim of the French president François Hollande, to reverse the unemployment trend, would come true. In august, the unemployment rate has lowered by 1.5 %. It was the first time that the rate of the unemployment has lowered since 27 months. 277.500 job-seekers were deleted from the list of Pôle emploi (the French Job center). The French minister of Labor, Michel Sapin has considered the celebrations as too early. Finally, he added that these were the first positive numbers and that the policy conducted by the government was the right one. However, this enthusiasm did not last for a long time. On Monday, Pôle emploi has announced that the result was influenced by a bug. The French telephone company SFR, which is responsible for sending messages to persons registered at the Pôle emploi, has sent messages but these persons have not received them. Thus, their situation has not been updated. It means that the unemployment rate has really lowered but only by 0.7 or 0.9 % not by astonishing 1.5%.

First Spain forecasted its debt to almost 100 % GDP, precisely 99.8 %. Four days later the Economy Ministry issued a correction to 98.9 %. As spokesman of the Ministry said it was caused by person who just switched last numbers. But this figure is not important anyway because we have to look at the trend. The trend is set up very clearly. More and more debt. Spain had public debt on the level of 68.5 % of GDP in 2011, to have 85.9 % in 2012 and Prime Minister Mariano Rajoy believes that this year Spain will end with debt of 94.2 % of GDP. Spain is definitely a big problem for EU.

Bank of Japan has not changed its policy at all. The Policy Board of the Bank of Japan decided, by a unanimous vote to proceed to increase monetary base at an annual pace of about 60-70 trillion yen. The purchases will consist of Japanese government bonds, Exchange-traded funds (ETFs) and Japan real estate investment trusts.


The US was on the radar of everybody this week. The debt ceiling issue and so called shut down of the federal government had moved by markets all the week. Frankly speaking there is nobody who really thinks that the ceiling will not rise. It must. Otherwise it will be a real chaos. Everybody is talking about. Failure to raise the U.S. debt ceiling could damage not only the United States but the rest of the global economy according to the International Monetary Fund and the same opinion is held by nobody else than Mario Draghi. The fact is that this political issue is on the radar of all investors. American banks for example are afraid also from the reaction of public. They allegedly stuffed ATMs with more cash in the case of panicked withdrawals. We should provide just two interesting points connected with this state of affairs. First of all the so called shut down is only imaginary. Everything works like any other time. It means that approximately 85 percent of all government activities are actually being funded during this „government shutdown“ and approximately 1,350,000 „essential“ federal employees will continue to work during this „government shutdown“. You will receive mail, public school stay open, FED is printing, air traffic controllers will continue to monitor traffic at US airports and so on. All people know that it is impossible not to increase debt ceiling and the debt of the US government. The debt is right now more than 106 % of GDP or 16 trillion USD and it will rise. So the crucial question is where is the end? Frankly speaking it is precisely at the time when investors became very cautious to lend money to the US government. Otherwise we will see only one thing. They will increase their debt ceiling once again and once again. So this is not the last time it going to happened.

Matúš Pošvanc

Nothing Has Been Solved

The Euro crisis is not definitely solved. Greece unemployment rate in April 2013 was 26.9% compared to 23.1% in April 2012 and 26.8% in March 2013. The number of employed amounted to 3,636,042 persons. The number of unemployed amounted to 1,337,621 while the number of inactive to 3,337,051. It means that 3.6 million people in Greece are working to support 4.6 million of inactive people. And we had another problem in the country as well. Non-performing loans just surged to €66 billion, amounting to a whopping 29% at the end of March from a „manageable“ 24.2% at end-December. That’s a ridiculous 20% increase in total NPLs in three months that was only exposed due to the Troika’s stress testing!grecko_nepokoje

Portugal’s president threw country into disarray on Thursday calling for early elections next year. President Silva proposed a cross-party agreement between political parties to guarantee wide support for austerity measures needed for Portugal to exit its bailout next year, followed by elections. It was surprise for Prime Coelho who thought he had overcome a cabinet crisis. The 10 Y yields on governmental bonds were automatically almost 8 % which creates unsustainable environment to serve country´s debt.

France is destroying 8,000 jobs a day.” It said Pierre Gattaz, the new leader of business federation in France. It is probably overblown but it illustrates the situation in the country. France is being suffocated by high taxes and an over-regulated system and rising unemployment is direct outcome. Christophe de Margerie, head of the energy giant Total, said it very clearly: “The real problem we have in France is the state. Some 55pc of GDP in the hands of the state, and it is not being very well run. We live in a nanny culture where people expect the state to take care of everything.”

The International Monetary Fund lowered its 2013 global GDP growth forecast to 3.1% from 3.3%. According to IMF US will be down to 1.7% from 1.9% and the euro area GDP to contract 0.6% in 2013, downgraded from the previous estimate of a 0.3% contraction. The revision was made for 2014 as well.

The Japanese government plans to adopt a different measure of inflation. The government plans to use so called „core-core“ CPI which excludes volatile prices of fresh food and ass well as energy costs. The change could result in more pressure being put on the central bank to keep flooding the market with yen as the inflation target becomes harder to achieve. Ok. So it seems to me that inflate to infinity is the government official plan now.

As I mentioned above we had the FOMC minutes and Ben Bernanke appearance. The FOMC minutes have shown that it is very probable that the committee is divided about the present 85 billion bond buy policy and the final confusion came from the chairman who claimed that “Highly accommodative monetary policy for the foreseeable future is what’s needed” which is a little bit contrary to the FOMC minutes. We had a resignation of one member of the committee afterwards when Elizabeth A. Duke submitted her resignation following day which could be a logical response of what the „other half“ of the Fed thinks about present time policy. But who knows.

Guess, do outnumber full-time employed workers in the US the number of Americans who receive food assistance and/or are on disability? Simple answer is not. But do not be so fast. There are 116 million Americans with full-time jobs, which include 21.9 million government workers. The number of Americans who receive some kind of social assistance is 112.5 million. So far so good there are only 3.5 million more Americans with full-time jobs than there are Americans who are reliant on the government. Not very good perspective.

Matúš Pošvanc

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