Archív značiek: eurocrisis

Is there any Grecovery or Spainovery?

Besides strong public statements from EU Commission bosses that EU is in turning point in crisis the reality is much worse. You can find one example in Greece. Public Power Corporation has reported last week that many Greek households and corporations are not able to fulfill their obligation to pay their electricity bills. In total, debts to the power utility from unpaid bills currently amount to some €1.3 billion and growing at an average rate of €4 million per day. Yes this is also known as the “Grecovery”.

The similar situation is in Spain. Politicians started to celebrate because Spain has now clocked up two consecutive quarters of fragile growth and Spanish 10 Y treasuries (3.8%) have the smallest yield on the yearly basis. But the situation in country is not changing in the labor market. First there is 26 % unemployment rate. Spain has seen six straight years of job destruction. 198,900 jobs have disappeared in Spain in 2013. There are 1,832,300 households in Spain where nobody has a job. More than 3.5 million in Spain have been out of work for at least a year and some 2.3 million people have been out of work for at least two years. To demonstrate the seriousness of the situation is the example of IKEA 400 jobs offer challenged by 20,000 job claims from desperate Spaniards. It is stunning and it is possible to compare to Greece problem. There is no Spainovery whatsoever.

The same story is Italy. The country has also very low yield on 10 Y treasuries. On the other hand it is a little bit surprising to some of us that Italian bad loan rates rose at a stunning 23% year-over-year and in nominal terms it is EUR 149.6 billion. The Italian Banking Association admitted that it is the consequence of declining deposits (-1.9% YoY) and bonds sold to clients (-9.4% YoY) as Italy’s bank clients with bad loans have more than doubled since 2008.

A new study claims that an objective stress test of the Eurozone’s banks could reveal a capital shortfall of more than 770 billion euros (US$1 trillion) to bring bank´s capital to the level equal to 7 percent of their total assets to guard against failure in the financial crisis. The study shows that if there is a 40 percent fall in global stock markets which last over a six month period banks will need another 579 billion euros in a crisis to meet a 5.5 percent prudential capital ratio. We have to remained reader that the study covers only 109 largest banks compared to ECB exercise which covers 27 more. It means that objective stress test for all most important bank would create more complicated situation. The ECB stress tests assume that banks will write down only non-performing loans and meet ratio of 6%. The EU has agreed a 55 billion-euro backstop to resolve failing banks, which compare to those numbers look like drop in the see. The end of the stress test provided by the ECB will be in November 2014 as long as we don’t experience some real economy stress test.

China is becoming a hot topic. As we mention last week there is a possibility of the default of one investment shadow banking product this week and some claiming that this could trigger avalanche reaction within the Chinese banking sector. The PBOC has thrown nearly CNY 400 billion at the market in the last week but on the other hand Chinese regulators are probably prepared to let the product default to give a lecture to some investors not to think about these kinds of products as risk free. There are also some rumors that some citizens have been unable to withdraw „hundreds of millions“ in deposits in the last few weeks in the area of Yancheng City which indicates rising stress on the financial market. This is also a reason why Chines CDS´s are heading into the territory they were in the last summer when we experienced huge distrust among financial institutions. So could we be calm? Right now there is no reason to panic. Chines financial sector is state owned so we needn´t see any avalanche as we experienced in the west. But who knows?

Next week we have FED´s FOMC meeting and some started to speculate that FED could announce another tapering of monthly purchases from 75 to 65 billion USD as was indicated by the former FED´s president Bernanke. On the other hand we had some disappointing numbers from labor market and some disappointing numbers from stock market. We will see what exactly happens and what kind of impact it will have on shaky markets.

Matúš Pošvanc

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.

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.

debt_ceiling

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