Archív značiek: Italy

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

Italy is the same as Spain

Will the crisis trigger anti-environmental agenda? Who knows but e.g. Antonio Tajani, the European industry commissioner stated that „I am in favor of a green agenda, but we can’t be religious about this. We need a new energy policy. We have to stop pretending, because we can’t sacrifice Europe’s industry for climate goals that are not realistic, and are not being enforced worldwide.“ Yes very strict environmental agenda is not very healthy for European business environment which faces over regulation and higher taxation as well. Contrary to Mr. Tjani I am not a proponent of the weak currency and currency wars. The only sustainable path is a strong currency and easier business environment which means lower taxes and lower regulations. This is the only way to really boost economic activity within the Eurozone. The only problem is that politicians want something else.

Tax records will be shared around the world by 2015. That is the strong statement from G20 meeting leaders who want to crack down on individual tax cheats and global corporations which intend to pay as little tax as possible. “We are committed to automatic exchange of information as the new global standard,” states the G20 final communiqué. So we will see what this brings but as one saying claims “if you do not like tax havens, please do not create tax hells”.

Italy contrary to Spain is not on the radar of mainstream media and it lives its own live. But to be honest this country has a lot of problems; maybe more than Spain which is in troubles. From the political point of view it is heading into the big political crisis connected with Silvio Berlusconi and his supporters who threaten to abolish Italy’s governing coalition which would be not good for economic reputation of the country. About one month ago Berlusconi was found guilty by Italy’s highest court. The verdict – four years for tax fraud. But it seems that Berlusconi and his party want special rules. Italian media are therefore in a constant state of alarm. Every week there are new headlines claiming the government is about to collapse, for real this time. We will see. Fact is that the country is not in a good economic performance and any government failure could cause so many troubles. The biggest issue for government could be Italy´ banking sector which is, simply said, broken. One of many banks in trouble is the Monte dei Paschi di Siena Bank which is facing nationalization. The management of the bank set up plan to raise 2.5 billion euros capital from shareholders within next 12 months. But this is very unlikely scenario and the bank could fall under direct state control. Italy, struggling to control its 2 trillion euro public debt and looking to boost revenues through privatizations, can fall in more deep troubles once it becomes a shareholder of the bank and would be responsible for another indebted body.

Italian housing market is set to shrink significantly and not only because of the housing bubble but also because of trends within Italian population. The most important buyers – it means between 30 and 40 years old – have declined by more than 1 million since 2005 and trend will continue till the end of this decade. It means that there will be less possible buyers of houses. Outcome? It is very probable that prices will follow. And be aware of the fact that Italian 10 Y treasuries are for the first time higher than Spanish one in last 18 month.

We have 5th anniversary of the Lehman failure. 5 years of crisis. What is new? The world’s developed (G7) nations have added around $18tn of consolidated debt to a record $140 trillion combined and they have produced only $1tn of nominal GDP activity. In other words they had to use $18 dollars of debt to generate $1 of growth. Is this sustainable? For now? Yes. But only because we have such a low interests rates which are set up artificially by central banks.

After two tough days of negotiations in Geneva John Kerry and his Russian counterpart Sergey Lavrov announced they have reached an agreement about situation in Syria and how Syria must act to destroy its chemical weapons. It means that the military intervention from the side of the US is not very likely. At least for now.

Matúš Pošvanc

We Need Reforms

The European Central Bank warned about the risk of a renewed banking crisis. The main reasons behind are the euro zone’s slumping economy and a surge in problem loans. The logic is simple. Prolonged recession will cause that many borrowers were not able to repay their debts which creates more stress for European banks balance sheets still not recovered from 2008 event. The ECB did not mention specific banks but it said the most vulnerable were those in countries with high unemployment or falling house prices; translated it means banks in Italy, Spain, Greece, Portugal and Netherland.

reformyAnd we should be worried about unemployment. It is over 12 % in Eurozone. Scarier is of course the Europe’s youth unemployment which continues to rise (to 24.4%) and having not fallen for 24 consecutive months. And Spain is the ‚winner‘ with 41 consecutive months without any drop. And who belongs into the club of record holders? Italy 40.5%, Portugal 42.5%, Spain 58.2%, and of course Greece 62.5%.

Yes, we need reforms. UK´s Foreign Secretary William Hague for example called for cooperation between Britain and Germany to lead reforms within the European Union. He stated that „Finding the right balance between integration in Europe for those who need it, and flexibility where it is best for our economies and our democracies, is the great challenge of German and British diplomacy over the next few years.“ But I am not so sure that anything happens. Why? Because German finance ministers Schaeuble thinks on the other hand that we need to preserve Europe’s welfare model otherwise we will witness revolution. And if U.S. welfare standards were introduced in Europe, which are actually almost the same „we would have revolution, not tomorrow, but on the very same day,“ he told in Paris. So what to do? Thanks to God we have European Commission. It came with some solutions. To end austerity and extend deficit deadline. For who? Today for Poland, Slovenia, Spain, Netherland and Portugal. Tomorrow for those who realize that to behave in a responsible manner is not very advantageous.

GDP of Slovenia shrank 4.8 percent from the same period in the previous year. It only means more problems with deficit issue and set up a big question mark over the country if it is able to process cleaning up within its banking sector. On the other hand Slovenia is a Euro club country so rescue package is probably already pre-prepared.

France is fighting with recession. The number of registered jobseekers rose almost by 40,000 in April and the total number of jobseekers was 3.26 million, the highest number ever and is still accelerating. France is trying to cut its public spending and it is very probable that it has many, many options if we consider that the government was able to spend € 250,000 for wines per year during the crisis. Deep underneath the Elysee Palace, next to a bunker with the code name „Jupiter,“ is the best wine cellar in France. There are more than 15,000 bottles and a small portion of this precious stock, about 1,200 bottles, will be auctioned off at a sale on May 30 and 31. You can buy and help France to recover.

There are many unintended consequences of monetary easing. We informed you about McDonalds last time which rose prices of some products more than 20 % in Japan which follows this policy. It is Apple today. Apple raised the price of iPad and iPod in Japan after a weaker yen that’s boosting importing costs.

We have some positive news from the US. Business activity rebounded in May after declining for the first time in more than three years. The Chicago Business Index rose to 58.7 in May from 49 last month; everything below 50 signals contraction. Positive news was strengthening of consumers’ confidence which rose in May to the highest level in almost six years. The Thomson Reuters/University of Michigan index of sentiment increased to 84.5 in May, the strongest since July 2007, from 76.4 a month earlier. On the other hand with a new month we have also some sad record in the US. The total number of people in the receiving disability benefits hit a record 10,978,040 in May, up from 10,962,532 million in April. It means that the number exceeded the population of people living in Georgia, Michigan, North Carolina, New Jersey or Virginia together.

And if you think that you can improve the economy by monetary stimulus you can prepare yourself to be a central banker. How? Just play to be Ben Bernanke by the WSJ application called FEDERATOR. You will see how it is difficult. The target of the play is 2 % inflation and 5 % unemployment. So let´s try it. I tried it eleven times and always failed:

Matúš Pošvanc

New Definitions

jens_weidmannThe ECB cut basic rates last week to proceed with verbal interventions this week as well. Mario Draghi said that they are ready to cut interest rates again if needed and they will accommodate the policy to the data that arrives from the euro-area economy in the coming weeks. The Governing Council allegedly consider openly for the first time at the possibility of reducing the interest rate on the deposit facility to less than zero. It is very probable that they will consider new steps very soon because spring forecast of the European Commission is not very optimistic. Annual GDP growth this year is now forecast at -0.1% in the EU and at -0.4% in the euro area. The ECB is allegedly also considering buying bad loans from southern parts of Europe to relieve the pressure on banks in crisis-stricken countries. According to Die Welt the ECB is also discussing whether the bank could itself buy asset-backed securities which simply mean that it wants to put on the balance sheet some junk assets and will directly finance needs of new loans within problematic economies. And if you think that currency wars are not heating up you should be aware of the fact that the Reserve Bank of Australia cut its benchmark interest rate to a record low by a quarter percentage point to 2.75 percent. And who else join the club? The Bank of Korea unexpectedly cut its key interest rate to 2.5% from 2.75% probably as a reaction to monetary easing steps of the Bank of Japan and on Wednesday, the National Bank of Poland cut its key interest rate to 3% from 3.25% as a reaction to ECB measures we have written a week ago.

Unemployment in Greece hit a new record. The number of employed decreased by 270,766 persons on yearly base. Greek Statistical Bureau reported that February unemployment rose to a new record high of 27.0%, with the January number revised from 27.2% to 26.7%. The unemployment rate among youth is 64.2 % which is a new record as well.

Do you still believe that Cyprus was an extraordinary case? And do you still believe that nothing like a Cypriot nationalization is possible within other European countries? According to a proposal of the European Council deposits over €100,000 are likely to be hit in the event of future possible European bank collapses. Uninsured deposits of over €100,000 would be bailed in if the bank is in troubles. Good news is that depositors would rank at the end of the process, with other creditors first absorbing losses.

It is more than interesting that while Italian sovereign bond spreads are back to near pre-crisis levels their delinquent loans re-accelerate once again. More than € 130 billion of Italian debt is currently delinquent and the current percentage of loans in default is approaching 8% of the total. It is more than interesting because everything is fixed in Europe, isn´t it.

The euro skeptical party „Alternative for Germany“ was officially founded just a few weeks ago. But it already has more than 10,476 members and some 2,800 of which have switched allegiance from Germany’s established parties. The party lures members by slogan: „Straight talk instead of S€datives“. Its support is still around 4 % which is under 5 % quorum needed to enter the federal parliament.

French Finance Minister Pierre Moscovici declared that the era of austerity is over and that austerity is not the only way to fight the European crisis. Finance Minister Schaeuble agreed that some euro states (among them France) need more time to reduce their budget deficits. Different opinion has his counterpart in the Bundesbank Jens Weidmann who said that „You can’t call that savings, as far as I am concerned … To win back trust, we can’t just establish rules and then promise to fulfill them at some point in the future. They have to be filled with life…“. I think that not only Mr. Weidmann but all of us should have to get accustomed with a new definition of rules that there are no rules once we are talking about cutting of social spending.

There are still more doubts about the China´ GDP growth and future development of country. Private and public debt is estimated over 250 % of GDP and the US diplomatic cable released on WikiLeaks revealed that Chinese GDP statistics are „man-made“ and are not consistent with electricity use, rail cargo, and bank loans. More and more experts expect that China’s miraculous growth is over and will decline to 6 % by 2020 and maybe lower (3-4%) due to the ageing crisis. China’s ageing crisis is tracking Japan’s tale with a 20-year delay.

International Monetary Fund head Christine Lagarde said the U.S. government’s debt reduction plans are too abrupt which could cause that the U.S. economy would be contracting by over one and a half per cent. Not very good perspective if you realize that the US needs real and healthy growth more than ever. We have to realize that although stock indexes reached new times records the month April was the 195th straight month that the number of American workers collecting federal disability payments increased; in nominal terms it means 10,962,532 which are more than population of Greece. Yes. This is a new definition of healthy growth.

Matúš Pošvanc

ECB Confirmed Recession

draghi bratislavaAt Bratislava´s meeting the Governing Council of the ECB rewrote the monetary history of Eurozone. Council decided to lower basic interest rates to 0.5 % starting from May 8th 2013. It is nothing else just a confirmation that nothing was solved within the Eurozone. Otherwise they would raise rates. Mario Draghi press conference looked like a communist party meeting once he celebrated a new release of 5 euro bank note with happy children and he stated that ECB is prepared to use negative interest rates for bank deposits if necessary to stipulate velocity of money but insisted that the economy would recover later this year as many times. The move was somehow expected because it comes on the heels of dismal economic indicators. In recent months, economic confidence has worsened and unemployment has risen over 12 percent across the currency zone. But the real problem is youth unemployment. French youth unemployment has risen for 13 months in a row to a record 26.5%; Spain is at 57.2% and Greece’s is a stunning 59.1%. Other candidates for records are Italy and Portugal with 38.4%. Even the German economy showed signs of weakening. So something was necessary to do to stipulate the economy. But easier credit just stipulates projects which need not be sustainable and without new stipulations will cause more problems in the future. There is nothing like a free lunch.

Spain fell deeper into recession in the first three months of the year. The data showed that Spain’s gross domestic product contracted 0.5 percent in the first quarter from the last three months of 2012, mainly because of sliding domestic demand. One of the most significant problems for the economy is housing market. Standard and Poor’s warned that Spanish house prices are to fall a further 13pc by the end of next year which means only more problems to their banking sector and claims for more help from other EU member states. The agency is warning that the housing slump is deepening across the Eurozone and Netherland and France are next countries with troubles. French declines are “gaining momentum”, with prices likely to fall 5pc this year and a further 5pc in 2014, agency said.

According to France labor ministry the number of unemployed jobseekers hit 3.224 million which means a new record. March was the 23rd consecutive month of rising unemployment in the country. The ministry did not provide a current unemployment rate, but said it was at 10.2 percent at the end of 2012 and remained below the 10.8 percent record set in 1997.

And do you still think that Cypriot nationalization of bank accounts over € 100,000 by rate of 90 % was something exceptionally? If so, you could be interested that the Spanish government started to require from any resident with an overseas asset worth more than €50,000 and who lives in Spain at least six months (183 days) of the year to declare what they own abroad. As relatively few Spaniards have assets outside of Spain most affected will be British pensioners and retirees. They are required to declare UK bank account numbers, mortgages and other details under the threat of €10,000 penalty.

Greece is finally forced to make some reforms to transform their unsustainable welfare state. 15,000 state employees lose their jobs in Greece as the Greek parliament passed a new law which overturns what had been a constitutional guarantee for civil servants of a job for life. Some 2,000 civil servants will lose their jobs by the end of June, another 2,000 by the end of the year, and a further 11,000 by the end of 2014.

FED will not change its policy as we emphasize for a few weeks and will continue with $85 billion a month asset purchasing program. The main reason behind is still a weak economic growth. Chicago PMI hit 49 which indicates that expectations about economy are not good and it seems that nobody told the respondents that the economy is recovering. The central bank’s balance sheet has ballooned to more than $3.3 trillion and it is planned to be $ 4 trillion at the end of this year. If you want to understand some monetary language you could try to puzzle out this statement „The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes“. Good luck.

Matúš Pošvanc