Archív značiek: Germany

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

Merkel won but reforms failed

German elections – actually the most important EU election – ended by the victory of Angela Merkel. On the other hand the election ended with the defeat of strong right wing policy. It seems that Merkel is willing to create a strong big coalition with German socialist and as it is in politics it means many compromises in the field of economy, austerity measures, social policy and it can slow down or prevent to make any reform which is needed in Germany as in any European country. It means that we will still see a great involvement of taxpayers’ money in saving the Euro and periphery countries. What was interesting is the outcome of so called Germany’s euroskeptic Alternative for Germany (AfD) party which is not finally in the parliament but it stole voters especially from Christian Democrats (230 000 from CDU) and  Free Democrats (330 000 from FDP).merkelova_problem

We definitely need strong Germany. Especially, if there are so many problems within the EU. Italy is still in the political crisis mode because of Berlusconi. Any political weakness could trigger big problems for the serving of the debt of the country. Italy´s prime minister said that „Italy is a trustable country with a budget and debt under control” but I do not think that anybody believes him. The country has a plan to continue fiscal consolidation and maintaining the deficit under control and the government is also working to reform the country’s labor market to encourage companies to start hiring. But as usually more words, promises and not so much actions.

Allegedly unprecedented cuts in public spending for 2014 announced France. The only problem is that it is worth only 15 billion euros. It is not too much if you realize that it represents approximately 3.3 % of all spending of central government. So called it unprecedented is a little bit strong. 80 percent of these savings will come from ministries of defense, finance and environment. Only 20 percent of the savings will come from tax increases. State spending, which will reach 57.1 percent of GDP this year, is expected to drop to 56.7 percent in 2014. On the other hand public debt will reach a record 95.1 percent of GDP in 2014 because of smaller GDP growth.

And as we are accustomed so many times with Greece the troika has once again doubts about Greek projections for a primary surplus this year and the next one which will be either minimal or noting. The same is true about Greek projections for a primary surplus of 1.5 percent of GDP at the end of next year. But do not worry. It is a just a matter of time once everything changes because 4 % growth is coming. Once again. And once again the next year.

The financial crisis has turned almost one in ten of the UK’s 2.5 million companies into so called “zombies” companies which face a insolvency. So-called zombie businesses have soared by 108 per cent in the last five years, to 227,000. These companies are able to produce at their very best only enough cash to service their bank and supplier debts, have liabilities far in excess of their assets and yet collectively employ around 500,000 people. And this is also one of the reasons why Bank of England cannot increase interest rates. Once this happens all of these companies will bankrupt faster than you count three. Unemployment and the damage to healthier companies which are their business partners could be even worse.

China’s economy is probably growing at an annual rate of 4 percent, said Marc Faber. He stated that „I said to an economist I think China is growing at 4 percent per annum and he said do you mean minus 4 percent? It is probably exaggerated but there are still more and more investors who are very skeptical about numbers from China which declares economy growth by 7.7 percent last year and the outlook for this year is targeted to 7.5 percent. And it is interesting that not only we see the currency wars. There surprisingly exist politicians who claim the same. 60 US senators signed letter to protest against the Japanese currency manipulation. The only mystery for me is why they forget that it is not only Bank of Japan but also US via their massive quantitative easing policies and monthly bond purchases who manipulate with the currency.

The US Federal Housing Administration will likely need a cash infusion from the U.S. Treasury. The agency offers private mortgage lenders guarantees against homeowner default would face a shortfall of $943 million for the fiscal year that ends on Monday. But the biggest issue in the US is the debt limit problem. Treasury Secretary Jacob Lew said that the government has time only till Oct. 17, leaving the United States just $30 billion cash on hand to pay its bills. It means that the US will be unable to pay all of its bills. The US reached its $16.7 trillion debt limit in May this year. Since then, it has been using so called „extraordinary measures“ which consist of for example suspending U.S. investments in federal employee trust funds ($300 billion). So we will very probably see interesting quarrel between Democrats and Republicans which at least in my opinion ends by increasing of debt limit. But who know. Maybe we will see the shutdown of the most powerful government of the world. But it is not very likely.

Matúš Pošvanc


We Intentionally Created Bubble

The hearing in front of the German Constitutional Court about the legality of the Outright Monetary Transactions (OMT) scheme of the ECB was on Tuesday and Wednesday, but the final verdict is not expected before autumn. The ECB reconfirm before the hearing that there is no upper limit of the program as a reaction to the German newspaper report published last week on Sunday. Report stated that the ECB had set a limit of 524 billion euros on the OMT scheme. “As indicated on various occasions, there are no ex-ante limits on the amount of Outright Monetary Transactions. Their size would be adequate to meet their objectives,“ said spokesman of the ECB. The German Constitutional Court is primarily is interested about legality of ECB actions and not whether the European Central Bank’s (ECB) was successful with its policy. I am not a lawyer but it seem to me that decision of the court will be complicated and not very clear if we realize that the OMT mechanism were not use anytime and in fact it is more an verbal intervention without any exact written rules and conditions. But expectations about the decision are in the mood that the court will tell something like “yes but …”.bubliny

Andy Haldane, Bank of England director of financial stability warned of the risk to global financial stability last week when he stated in a wide-ranging testimony to MPs „Let’s be clear. We’ve intentionally blown the biggest government bond bubble in history … We need to be vigilant to the consequences of that bubble deflating more quickly than [we] might otherwise have wanted.“ The Bank of England immediately issued a statement that Haldane’s remarks were just his „personal views“ and stressed that „Any attempt to return interest rates quickly to more normal levels would recreate recession conditions.“

Switzerland will join the international push against tax dodgers and help develop global standards allowing banks to share customers’ details to combat tax evasion. This is a recommendation of a committee appointed by the finance ministry. This will mean the end of the tradition of bank secrecy in the country. According to Boston Consulting Group Switzerland is the world’s biggest offshore wealth management center. And it seems to end this primacy.

Spain’s credit rating stayed at BBB-. The rating remains at the same level because of the country’s commitment to the implementation of a comprehensive fiscal, structural reform agenda remains strong but outlook is still negative. But high unemployment, recession, shaken banking sector and budget deficits are not the best outlooks for the economy.

It could be Japan which causes some global financial meltdown due to the policy which consists of fiscal stimulus and monetary easing. Japan is one of the most indebted nations and the situation becomes more and more dangerous if we realize that Japan use almost 50 % of its tax revenues to service their government debt. But we needn’t be worried because Mr. Abe has a genial plan to promote buying government bonds by public which is very similar to former Soviet or German propaganda. So let´s meet the Japanese girl band whose skirts get shorter when the Nikkei rises and whose debut single called “Abeno Mix” has direct references to quantitative easing and construction bonds:

The U.S. budget deficit increased in May by 10 %. Outlays exceeded receipts by $138.7 billion last month compared with a $124.6 billion shortfall in May 2012. On the other hand the U.S.’s AA+ credit-rating outlook was increased this week after two years to stable from negative by Standard & Poor’s. The main reasons behind are that the U.S. has strong economy and monetary system and that the U.S. dollar has the world’s key reserve currency status. I think that the S&P should also wonder how the U.S. repays its debt worth more than $ 16 trillion. This is also the main reason why the FED is not able significantly taper its bond purchase program although investors are behaving as if they don’t believe to the FED (the yield on the 10-year Treasury note has risen to 2.15 percent from 1.63 percent). The only possibility to taper the program is to rely on presupposition that other central banks will boost their balance sheets and these stimuli go global and keep low yields in the US. Otherwise the U.S. government will have huge problems to service its government debt.

Matúš Pošvanc

More centralization

ECB decided not to make any changes to the policy and all rates remained unchanged. Mario Draghi said that ECB sees 0.6 % decline in GDP within Eurozone in 2013 and some downsides risks persist in the economic outlook. On the other hand he reconfirmed that ECB policy will remain accommodative as long as needed. ECB is also preparing a big external audit of 140 banks across the EU which represents 80 % of Europe’s banking assets. It seems the ECB appears to be questioning the reliability of the banks own figures because the project should have two basic aims: to find out which banks inhibit lending and which of them could have some troubles to be solved by Member states or ESM bailout fund. Allegedly France and Italy are strongly against this ambitious plan. Who knows why?

If you are desperate what to do, impose trade tariffs on some products. The European Commission on Tuesday announced it was imposing tariffs on Chinese solar panels because of „price dumping.“ The commission is first introducing a two-month period of low-level tariffs at a level of 11.8 percent. In August, however, the penalties will skyrocket — to between 32.2 percent and 67.9 percent. IT took just one day for the contra reaction from the Chinese side. The Chinese ministry said the government had begun the probe into EU wines at the request of Chinese wine makers. „The Commerce Ministry has already received an application from the domestic wine industry, which accuses wines imported from Europe of entering China’s market by use of unfair trade tactics such as dumping and subsidies,“ it said in a statement. As you can see not only currency wars will be popular in the future but also trade wars. But there are no winners at the end of this process. There are only losers from the consumers’ side.

It is interesting as on the one hand is France calling for more centralization and more common policies on the EU level and on the other hand President Francois Hollande is able to say: „The European Commission cannot dictate to us what we have to do.“ The reactions came after the commission published recommendations for 23 member states, including France where the commission called for reforms in 6 areas including pension system. But we are quite accustomed that big EU countries just bully the commission, while smaller member including Slovakia will have to obey. Nothing has changed for hundreds of years. The lasted data from France showed continuing problems. New car registrations in France dropped sharply in May. A total of 148,554 new cars were registered in France last month, which means a 10.3-percent drop compared to the same period in 2012. The biggest losers were the Renault which plunged by 16.5 percent and Citroen which also dropped sharply, by 14.5 percent.

imf_bernankeIMF was quarreling with the European Commission this week about rescue plans over Greece. First IMF stated that that it made „notable failures“ on rescue package for Greece, setting overly optimistic expectations for the country’s economy and underestimating the effects of the austerity measures it imposed. The following day the European Commission has hit back at criticism over its handling of the Greek debt crisis and stated that „We fundamentally disagree that not enough was done to promote growth, this is plainly wrong and unfounded”. The fact is that Greece is six consecutive years in recession and it does not seem that anything could help the country apart from drastic reforms of public administration, labor code and lowering taxes.

According to some sources China is prepared to tolerate lower growth before triggering fresh stimulus to lift activity. New China leadership has set up allegedly new objectives for growth (7%) compared to their predicators (7.5% to 8%). Talks comes in the times when weak data in April and signs of sluggish factory activity in May have raised concerns the economy could slow further in the current quarter.

How the bankruptcy looks like? You can experience within Detroit. On average, Detroit has spent $100 million more a year than it collected in taxes and other revenue. Detroit´ cash flow was $64 million in April but the city owed $226 million in payments on pensions and other obligations, forcing the city to delay paying its bills to stay afloat. The total liabilities of the city are over 17 billion. Bankruptcy is therefore imminent.

Consumer spending in the U.S. unexpectedly declined in April. Purchases fell 0.2 percent after a 0.1 percent gain in March. As we wrote last week other reports showed consumer confidence and business activity jumped in May. So you can choose. The biggest expectations were connected with waiting for the US non-farm payroll data on Friday (+175 k, expectations +165). The Unemployment rate was 7.6% higher than the expected 7.5%. The number of unemployed workers in the U.S. increased from 11.659 million to 11.76 million the highest since February. It means that the FED will continue with the $85 billion in monthly bond purchases program. According to some analysts we will see the continuation of the program till job growth averaging at least 200,000.


Matúš Pošvanc