Archív značiek: financial crisis

ECB´s words over reality

ECB´s declaration to buy any bond on secondary market or Dragi´s “whatever it costs” is still strongly rooted in the minds of investors. Otherwise it will not be so positive for Italy which is again in some political crisis once the Prime Minister Mr. Letta has declared that he is prepared to resign. But Italians bonds have dropped at their lowest levels since 2006. Mr. Letta should be replaced by Mr. Renzi and markets believe that he will be able to set up a new government.

But not so fast with overestimate of the ECB´s the powers. Last week we informed you about the decision of German Constitutional Court about the OMT program prepared by ECB. It seemed last week that the GCG has skipped the final decision to European Court of Justice but some German’s analysts claimed that the decision creates some uncertainty because it could happened that the GCC could forbid Germany to participate on saving Euro at any costs or could force German government in some cases to leave Eurozone and that the decision cannot be ignored by government and other public institutions as Bundesbank.

Stress tests do not start yet and there is some information which could be for some European banks very sensitive. The new chair of the Supervisory Board of the European Central Bank Daniele Nouy said that “We have to accept that some banks have no future.” She has meant by that exactly what you think. Some banks must be left to die or bankrupt. She also said that “I do not have any idea of how many banks have to fail. What I know is that we want to have the highest level of quality”. Highest level of quality is the best benchmark and we have only to hope for the best because the last time the best quality was Dexia as well which had to be rescued a while after it passed by last stress tests.

Recovery is sometimes very interesting. One could think about it as better economic conditions for general public but it seems to be opposite. Especially, if you take as an example so called Greecovery.  As national statistical bureau has shown Greek unemployment rose to a record high (28%) in November. It means that the number of people unemployed rose to 1.382 million. The Greek youth unemployment rate soared to 61.4 % which means a new record as well.

We were a little bit concern about the future of China´s financial system at the end of January because of possible default of one the Wealth Management Products (WMP) which lost 0.5 bln. USD. But it was saved two days before the deadline to repay investments. An if you think there is everything alright right now in China you have to be aware of the fact that Chinese coal companies are trading near or below book value because of low prices of their products. The problem is that many of them have loans to finance their operations which are used as collateral in some high yield financial products. One of them which raised approximately 47 million USD from wealthy clients technically defaulted on February 7th once it could not return funds to investors. I think that to monitor shadow banking system in China would be worth for everybody because the crisis trigger could come from this area anytime.

A little bit unexpectedly but the US House approves rising debt limit without any condition till March 2015 and technically ended two years discussions about conditions, saving and public finance consolidation. The vote was definitely a victory for President Obama, Democrats and those Senate Republicans who have argued that spending money for previously incurred obligations was essential for the financial standing of the federal government.

Matúš Pošvanc

We are globally freer

Index of Economic Freedom was released last week. Slovakia was 57th down 15 places from previous year. The main reason behind decline of economic freedom in Slovakia was higher taxation, non-flexible labor market regulation and slow and inefficient judiciary system. We belong among other 59 countries where economic freedom decreased this year. On the other hand the economic freedom globally is on its highest levels for 20 years; it was lowest in 1997.


The freest economies are Hong-Kong, Singapore, Australia, Switzerland and New Zeeland. But still 65 % of population is living mostly in not economically free countries due to the fact that most populated countries are India and China and they are considered as not full free economies. The US is another surprise. And it’s not difficult to see why. The U.S. is losing ground. Marginal tax rates exceeding 43% and they cannot finance runaway government spending. The national debt is skyrocketing and Obama administration continues to shackle entire sectors of the economy with regulation, including health care, finance and energy. The intervention impedes both personal freedom and economic prosperity.

To have more economic freedom we need more market oriented reforms not regulations. And it seems to me that in Europe this is only visible with connection to Britain whose representatives threaten from time to time that they leave EU if reforms are not going to happen. The same we heard from the country’s chancellor George Osborne on Wednesday (15 January). He stated that the UK will leave the European Union if the bloc refuses to reform. „It is the status quo which condemns the people of Europe to an ongoing economic crisis and continuing decline,“ he added. He also urged that Europe’s labour market was becoming increasingly uncompetitive and was falling behind China and other economic blocs.

The European Central Bank said last year that it will use stricter rules when stress testing banks’ balance sheets. But it seems that this year is everything different. ECB allegedly favor 6% capital requirement in bank stress test and not 8 % was discussed last year. Final number could be finally smaller because small number of countries want an easier benchmark and may press for compromise lower than 6%. We will see if stress tests will not be just complete farce. On the other hand the European Central Bank is concerned that national differences in how bad debt is classified could cripple its probe into the health of euro-area banks. European banks’ bad loans are classified according to a variety of national rules, which makes a comparison among lenders difficult. The aim of the ECB is to define as non-performing all exposures, including loans, debt securities, financial guarantees and other commitments, which are past due for more than 90 days. So finally we can have more serious problems in banking sector than we think.

Switzerland has announced its intention of becoming a renminbi hub in December 2012 and competes with other European financial centers as Britain, Germany and France. The signing of a free trade agreement (FTA) with China earlier this year might give Switzerland a boost. China´s intention to have reserve currency with connection of gold hoarding is imminent. The big problem in China remains still the same. An out-of-control credit creation process which is blowing up. Instead of crushing credit creation, the PBOC’s liquidity rationing has forced distressed companies into high-interest-cost products in the shadow-banking world. But Industrial and Commercial Bank of China, the world’s largest bank by assets, said that it has no plans to rescue investors in a troubled off-balance-sheet investment trust product named Credit Equals Gold #1 Collective Trust Product which matured January 31st with outstanding 492 million. And If the trust product goes into default, it could possibly be the first default to test the China´s financial system. We will see and we must to wait till the end of the month.

We finish today with just two quotes from the Dennis Lockhart, the Atlanta Fed President who stated that “One of the stupidest things a central banker could do is comment on the stock market“ and then he added that the stock market is not „a bubble in any way“. Not bad.

Matúš Pošvanc

They’ll leave again

So it happened. Finally. The recession is over. The 0.3 % growth is considered as the end of it. Not so hurry. Cautious is also Mari Draghi who said that he is very, very cautious about prospects for growth and added that Syria situation could lead to some geopolitical risks. The rates remain record low. Bank of England identically let rates record low (0.5%) and continued in purchases of bond on the same peace (375 billion £).

Greece definitely must cut spending. As you know there are rumors that Greece will need another 10 billion euro bailout and Troika is starting to be nervous. Andgreece_storm you need not be surprised when you hear stories like this. Dimitris Reppas, former minister for administration was once caught whispering to a fellow minister on a stage: „When the troika is here, always say yes, yes. They’ll leave again.“ One of the biggest tasks for the government is to decrease the number of public workers or stop subsidies to departments and more than 1000 organizations with no clear function. And Greece is full of them. One example is „Organization for Water Management in Certain Areas,“ which has exactly one employee and no one really knows what he does.

On the 27th of August, the project of the pension reform was finally presented by the French government. In spite of the protests of the trade unions and the syndicates, contributions would rise by 0.3 points in 2017. The government needs 7.6 billion to cover the gap in the pension system. By applying this step of the reform, it hopes to gain 4.4 billion euros. It means another growth of the expenses for the employees and the firms. Olli Rehn, the European commissioner for economic and monetary affairs, warns France before the rise of the taxes and the contributions. It could severely threaten the economic growth, but also the rate of the employment. The IMF shares the same opinion. It considers that the fiscal pressure has reached its limits in France.

Another bead example could be seen in Poland which will transfer to the state many of the assets held by private pension funds, slashing public debt. Private funds within the state-guaranteed system would have their bond holdings transferred to a state pension vehicle, but keep their equity holdings. As usually the devil is in the detail and it looks like pension funds will lose a lot of flexibility in what they can invest.

How to play with political cards on global scale? Here is suitable example. Russia agreed to restructure Cyprus‘ EUR 2.5 billion loan terms to a much more affordable 2.5% from 4.5 %. Why? It looks like Russia buys some influence in the area very close to Syria. Because consequently Cyprus´ Foreign Minister Ioannis Kasoulides assured that its territory won’t be used to launch military strikes against Syria.

Belong to the EU trade bloc or not to be a part? That was the question for Armenia. Surprisingly Armenian President Serzh Sargsyan has said he wants to join a trade and political union with Russia instead of an EU alternative. It is probably more political decision but frankly speaking to accept all trade conditions with EU would not be best choice too because of quite excessive regulatory environment.

We are probably heading into the state of multi reserve currencies world. China will very probably allow unfettered exchange of its yuan currency in its first free trade zone. If you still believe that economic data from China are correct you should read this. China’s National Bureau of Statistics announced that it had uncovered a serious case of faking of economic data by a county government in southwest China’s Yunnan Province. The government of the Yunnan province had forced local companies to report higher industrial outputs, resulting in artificially high economic figures. E.g. in 2012 Yunnan province reported CNY6.34 billion in output while audits showed only CNY 2.82 billion and in the first half of 2013, Yunnan published CNY 2.75 billion output while audits showed a mere CNY1.06 billion. China is a real economic wonderland.

Syria is still on the radar of all investors and media. Senate Foreign Relations Committee voted for limited authority for the president to use force in Syria. China and Russia is definitely against any intervention. So we will see what happens because UN approval is very unlikely. US jobs data were under expectations but unemployment rate decline to 7.3% from 7.4 %. I think that this data are not very supportive for tapering of the present FED´s policy but there is still possibility for this step. On the other hand Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said that FED should provide more stimuli to the economy, not less. So till September 17-18th FOMC meeting we cannot be sure. But my bet is that the FED will continue with the $85 billion in monthly bond buying program.

Matúš Pošvanc

War against Gold

indian_warThe war against gold continued in India. Many Indian customers find out this week that it is no longer possible to purchase gold by credit card. The Reserve Bank of India is leaving no stone unturned to discourage gold buyers in India. Indian consumers tend to convert gold purchases into equated monthly installments of three months or six months but Central Bank asked banks to stop accepting credit card for this kind of gold purchases. This affects most of the customers who enjoyed purchase and repay for it in longer term. Gold imports significantly decreased by 70 % and also compared to record high imports in May on the level of 162 tones. On the other hand some banks are trying to accommodate to new conditions. They try to buy gold on consignment basis and to keep it in places like Dubai due to the lower storing charges and bring to India by paying full money when required. Banks having such an infrastructure abroad would find this viable. Imports might rise again after the new arrangements are in place, said a sector official. Many also presuppose that demand in India traditionally pick up with the start of a series of Hindu festivals in August. Demand peaks during the festival of lights, also known as Diwali, in November.

The data about Chinese gold imports have been released last week. China imported 108 tons of gold and we witnessed the second largest import after the record level seen in March at 136 tons. China looks like heading to absorb over 50% of global gold output this year – and still rising. The reason why we did not witness a new record could be in the fact that gold is hold in strong hands for now and investors are not willing to sell at present prices. So far net imports through Hong Kong for the first five months of the year have totaled over 413 tons – double those of a year earlier when China imported just over 830 tons in the full year.

South Korea ranked 34th in gold holdings last month data showed Monday. South Korea’s gold holdings reached 104.4 tons. The country was ranked 56th in July 2011.

Gold sales from Australia’s Perth Mint declined for a second month in June. Sales of gold bars and coins totaled 49,460 ounces in June, compared with 92,781 ounces in May and 116,755 ounces in April. The similar situation is with the U.S. Mint which sold 57,000 ounces of American Eagle gold coins in June from 70,000 ounces in May and 209,500 ounces in April.

Matúš Pošvanc

Gold and Silver a Little Bit Stronger

First two days of the week were quite normal and both metals stayed plus or minus on the same levels. Both prices significantly jumped on Wednesday. Silver was for a while over $ 20 but then closed a little bit below this level. The next day gold almost touched $ 1300 but as day before silver stayed below it. Silver was more successful and closed the day over $ 20. Friday´s session was quite calm but silver did not hold $ 20 level.

Gold finally closed on $ 1284.8 per ounce what was $ 61 more compared to previous week. Silver closed on $ 19.92 per ounce what was $ 1.02 more compared to previous week. The gold/silver ratio is 1 to 64.51 (i.e. you could buy 64.51 grams of silver for 1 gram of gold, it was 64.75 week before). So silver was a bit successful compared to gold this week. HUI index (index of the most important gold mining companies) was on $ 225.03 and was up $ 9.14 compared to previous week. XAU index (index of gold and silver mining companies) was up as well and ended on $ 89.57 what was $ 3.13 more compared to the previous week. Indexes were up first time after five weeks. Last week data from COMEX showed us that bullion banks significantly decreased their net short concentrated positions on gold but increased them surprisingly on silver. This week report showed us that bullion banks slightly decreased positions on gold and silver as well.

Ben Bernanke was behind the rise of metals prices on Wednesday. First we had the release of the FOMC minutes which were not very much indicative what the FED is preparing for us. The only thing which is more significant from them is that committee is divided over current policy. Than Ben spoke and stated that the FED will continue with accommodative policy. In other words that the FED will very probably continue with purchases of bonds and both prices rose.

This week has occurred one interesting thing. I mentioned it two weeks ago when I wrote about gold and if it is in strong hands. The GOFO rate which indicates stress on the London gold market turned into the negative territory; first time after the Lehman Brother collapse. It means that someone with dollars needs the short term use of gold and is willing to pay the owner of the gold a rate of interest plus use dollars for collateral. It tells us that that the delivery situation (for 400 oz bars) is extraordinarily tight. And you have to realize that we are speaking here about the environment of institutional investors not small investors.


GOFO is negative more than 5 days in row on 1, 2 and 3 month rate. This has occurred only four times in the last 14 years. And each time a negative GOFO has been connected to significant bottom in the gold market. Put it into the perspective of the COT report where bullion banks moved into the long side of the market especially on gold and connect it with short term backwardation on both metals and we should state that we are witnessing bottom very probably. On the other hand there are some opinions that we could still go lower based on the simple assumption that corrections like this could hit basically 50 % of the previous peak (which means gold between $ 900 and $ 1000). As usually only time tell us. But what I am not still very sure is the bottom on the silver market especially if anything happens in global economy which could indicate any type of recession.

Overview of the prices of gold and silver for the remaining periods:


Gold chart


Silver chart



Matúš Pošvanc