Archív značiek: European Union

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.

Bitcoin´s week

It was a Bitcoin´s week. Everybody was talking about bitcoins. Last week we had some records concerning bitcoins. First, bitcoin surged to new USD record high when it added 100 % gains only in 7 days. Then it overcame 1000 USD; fact is that on three important exchanges. And it was traded for a while as much as one ounce of gold but then slide down 13 % back on Friday. Is it bubble inside it now? I would say that from the short term point of view, yes. There are not any such strong fundamentals which would stand behind this run and we can await some kind of correction. If history repeats bitcoin could fall to 500 or 300 USD. But who knows? The fact is that in the longer term it has still much greater potential as today’s prices.

Some good news came from EU. The unemployment rate was down of 0.1% and was 12.1% in October 2013. Among the Member States, the lowest unemployment rates were recorded in Austria (4.8%), Germany, (5.2%) and Luxembourg (5.9%). On the opposite side are Greece (27.3% in August 2013) and Spain (26.7%). But what is more stunning is youth unemployment rate (under-25 population). Spain’s youth unemployment rate has reached 57.4% once again very slightly below of Greece which was still at 58%. Italy and Portugal also experienced notable rises at 41.2% and 36.5% respectively. The number for the Euro-area is 24.4%.

European Central Bank Governing Council member Ardo Hansson the head of Estonian central bank said the ECB is ready to cut borrowing costs further and is also prepared to make its deposit rate negative as we were discussing last week. It is a reaction to the low inflation in Euro zone which is close to 0.7 % and according to expectation will be at most 0.8 % in November. The next meeting of the ECB’s Governing Council will be on Dec. 5, when it will also present new projections for growth and inflation. We will see if we see any surprise from the bank.

It seems that there is only one opposition to this policy and the leading personality of it is Jens Weidmann president of Bundesbank who said last week that „Rather than for monetary policy to waltz with fiscal and financial policy, we need to erect walls between banks and sovereigns,“ Weidmann said. „Sovereign bonds should be adequately risk-weighted, and exposure to individual sovereign debt should be capped, as is already the case for private debt.“ But if I should bet on something I would said that Draghi and company will overwhelm this only and dove´s voice.

Yields on Chinese government debt have soared to their highest levels in nearly nine years. It caused rise of borrowing costs broadly, creating obstacles for companies and government agencies looking to tap bond markets. The rise in borrowing costs and shrinking access to credit could have impact on the global economy which rest on the presupposition that China is going to growth. The recent rise in bond yields is because of worsening of funding conditions and growing expectations for a tighter monetary policy of PBOC. Interbank rate was also rose almost to 6 % highest since June 2013 where it was necessary to provide liquidity to the market because of the stress among banking and non-banking entities.

It was a thanksgiving day in US and nothing much has happened due to the typical American holiday. But we have to be aware more about future. If you still think that loans in US are not trouble anymore just be aware of this. As Reuters informed last week an increasing number of loans in US are slowly hitting their 10-year anniversary. This means that borrowers usually must start paying down the principal on the loans as well as the interest they had been paying all along. For a typical consumer, that shift can translate to their monthly payment more than tripling. More than $221 billion of these loans at the largest banks will hit this mark over the next four years, about 40 percent of the home equity lines of credit now outstanding. Higher delinquency rate coming from this scenario could hardly hit already weak banking sector in US.

Matúš Pošvanc

ECB four-flush

We already know that ECB is prepared to use so called OMT mechanism to buy on secondary markets government bonds in trouble. The only thing we know is that ECB is prepared but close details were never revealed to public. But the rhetoric was so strong that markets calmed down for now. Lower interests’ rates have been introduced two weeks ago. This week some hidden sources from ECB have revealed that ECB is considering introducing negative rates for commercial lenders who park excess cash at the ECB to minus 0.1 percent from zero. It would be the first time the central bank has adjusted interest rates by less than a quarter of a percentage point. The true is that policy doesn’t yet have a consensus, the sources said. But I still think that it is more rhetoric than real policy decision. ECB has still some other option to intervene on markets as another round of LTRO, similar QE policy as we are witnessing in the US or direct forex interventions to which Czech central bank have decided two weeks ago.  So we will see. But European leaders must be a little bit desperate because this news are coming with another measure which simply put should decrease extensive public debts by new debts. Yes you are reading correctly. The European Union is allegedly considering whether it could encourage countries to make long-term economic changes by offering them loans at below-market rates. Loans would be more suitable for smaller countries which have more difficult access to market sources. The only positive news is that loans for reforms would not be available to countries running excessive macroeconomic imbalances or under bailout.blafovat_karty

Bundesbank gave noticed in the report from last week that southern European countries and their banking sector are still within the same vicious circle. According to Bundesbank Italian banks have increased their holdings of Italian public debt from €240bn to €415bn since November 2011 (+ 73pc). Spanish banks have raised their holdings of Spanish debt €166bn to €299. (+81pc) and Irish banks are up 60pc with Portuguese banks up 51pc. And we can only consider as one of the consequence apart of OMT mechanism why yields on sovereign debts still on sustainable levels are. But this state is not definitely sing of health banking system.  Still works but not too long.

The best example of “effectiveness of the EU” is definitely moving parliamentary sessions from Brussels to Strasbourg. It is such a good idea that also Members of the European Parliament are tired of the monthly move from Brussels to Strasbourg for a week of plenary sessions. France on the other hand vetoes any change. After MEPs tried to merge two plenary sessions into one week last year to cut down on traveling time, France took the case to the Court of Justice of the European Union. What do you think happened? They won. So now MP´s are trying to change their strategy. They proposed that MP´s should in future be allowed to choose the seat of their institution themselves – with no mention of Strasbourg or Brussels.  We will see if they succeed.

As we are always emphasizing it is not only about public debt. The extension of the debt of the whole western society is enormous. And public debt is only one part of it. It is very likely that much of private debt is not effective as well as public one.  The situation is very considerable in the UK. Total personal debt in the UK has reached record highs – 1.4 trillion pounds. It means that households owe 94 percent of the UK’s economic output last year and an average household debt is about 54,000 pounds. It is almost twice the level of a decade ago. What is also more dangerous indebted households in the poorest 10 percent of population have average debts more than four times their annual income. So it is not very surprising that more than 130K people declare personal bankruptcy each year.

Globally, 86% of companies do not plan to hire in 2014. It is the output from the global survey within 11,000 companies around the world. Only 33 % of them are optimistic about the economic future for next year. Among most optimistic are US companies because 41 % of them presuppose better economic conditions in 2014 and only 19 % of them stated that they are not plan to hire anybody in 2014.

As we mention many times in the past China is preparing to enter world currencies world. One of the evidence is its vast activities in currency swaps with many countries or alleged increasing of their official gold holdings. The another step within this policy was last week clarification what the People’s Bank of China is going to do. There are two interesting points. First PBOC said the country does not benefit any more from increases in its foreign-currency holdings. It means that bank will very probably rein in dollar purchases as well. The second is that China’s central bank will “basically” end normal intervention in the currency market and will increase the role of market exchange rates and broaden the yuan’s daily trading limit. So do we see the step by step rise of new reserve currency? From my point of view, yes.

FED´s minutes revealed the dispute among members of monetary committee that they are prepared to tapper their easy-money policy within a few coming months. I still do not believe to that because it is not only about the unemployment rate which is if not manipulated at least managed according to some allegations that the last unemployment report before election in 2012 was manipulated. It is also about the structure of unemployment which is very bad. But who knows. On the other hand Bernanke has said last week that if FED tappers the policy of low interest rates remains for a longer period of time. It is clear evidence that nothing has been changed and trillion of US dollars from FED does not really help to economy. Otherwise we will see at least speculation about higher interest rates which also Keynesians consider as a healthy state of economy.

Matúš Pošvanc

More Debt Means Better Rating

The most important news of this week was connected with US and debt ceiling debate. But let´s start as usually with Europe. Austerity measures are more and more unpopular. One of the examples is Ireland today. Their budget proposal is not as austerity budget as it should have been. Ireland will drain a further 1.5pc of GDP from the economy in fiscal cuts and taxes over the next year but against the plan of 1.8pc. Finance minister Michael Noonan told this week that the nation can take no more. Ireland took €60 bn. liabilities of Irish banking sector in 2008 not to cause chain reaction within the Europe. But this step brought total disaster for the country and their public finances. Today´s public debt is 123 pc of GDP and budget deficit is running on 7.3 pc GDP.

Ireland is not alone. We still emphasize that the next problem of Europe will be very probably Spain. Their 10 Y treasury rates are still on sustainable levels, actually they are almost on the year lows but there are many problems within Spanish banking system. Bad loans in the country amounted to $247 billion in August what is a new record-breaking 12.12% of all loans outstanding and what is 30% higher than any previous years. This could end only with the help of the ESM or direct interventions from ECB. So be prepared.

Another sinner is Italy. It must introduce new austerity measures. Italian politicians have decided to sell some state assets. If you are interested you can buy more than 50 historic sites among them Grand Inquisitor’s villa, Orsini Castle near Rome, which was built for Pope Nicholas III in the 1270s or Villa Mirabello near Milan, built in the 18th century by Cardinal Durini, the Grand Inquisitor of Malta. The plan is to raise more than 500 million euros and Italians hope that castles and villas will be converted into the touristic facilities, creating much-needed jobs for the country’s struggling economy.

There is no advice for hopeless. We know how any asset bubbles end; by bursting. And we know what reasons behind the last one bubble in the US were – easy money and enforcement of regulations supporting non-credible owners to borrow. Similar situation is happening in the UK today. U.K. house prices rose to a record last month and government introduced this week a new program providing government-guaranteed mortgages to buyers with smaller deposits. Bank of England is easing and leaving basic rates at low levels. Does not seem to you at least a little bit similar to US before 2008?

China was declaring this week that the dollar regime as reserve currency is unsustainable. The China’s official Press Agency released news concerning U.S. debate about the debt ceiling that it is time to start considering building a “de-Americanized world” which would not be based on U.S. good or bad news. Does China want to lead the movement? Not so fast. We have to realize that China is one of the biggest U.S. debt holders. Another interesting point is that it seems to be very probable that during this political turmoil they were buying nothing else as US treasuries.  China’s foreign-exchange reserves rose last quarter by the most in more than two years and hit a record $3.66 trillion at the end of September. We won’t know for a while where the money went, but a big chunk very probably must have gone into US Treasuries. So as any other super political power these days China is declaring opposite what it is actually doing. But this is a new normal world. We have to accustom to it.

During the last week we had the most news concerning the situation in the US. As the new normal the triple “A” rating of U.S. was placed on rating watch negative by Fitch Ratings, which was connected with the fact that the government is not able to negotiate to raise its borrowing limit. So, more debt means better rating; at least for now. Finally the Senate passed the bill to reopen the government and allow fund new spending till January 15th 2014 and prepare room for negotiation about the extending of the debt ceiling. It is estimated that the debt ceiling should have been raised at least for another $ 1.1 trillion


. Politicians let themselves time till December 13 th as a target date for budget negotiations.  In other words we will see the same situation as today at the beginning of the next year.  What was quite interesting was reaction of the official China’s credit rating agency Dagong which has downgraded the U.S. rating from A to A- due to the fact that the fundamental situation that the debt growth rate significantly  outpaces that of fiscal income and GDP. This is correct.  But Dagong is not recognized by the SEC, and it does not have the influence of the big three: S&P, Moody’s, and Fitch. Other fact is that China itself is in the very same situation as US and this statement was more or less political one concerning the above mentioned fact of op-ed calling for a „De-Americanized“ world. And what should we afraid more? FED. The Fed’s balance sheet increased by over $50 billion in one week, by $100 billion in the past month, and by just shy of $1 trillion in the past year. That is what we should be aware more. US debt is on the second place.

Matus Posvanc