Archív značiek: Spain

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

Financial and Natural Hurricanes

Haiya is the name for the biggest hurricane ever which was heading towards Filipinas this week. According to experts there is not almost nothing built on the Philippines that can withstand winds like that. We know natural disasters very well but do we heading into the some which are caused by men? Very probably yes. Monetary policies are the best example of these days’ potential catastrophes for human mankind. They are direct proof that nothing has changed since 2008. Otherwise we would have higher rates. As we wrote last week ECB finally cut the basic rates by 25 bps to historic lows and they will keep them unchanged for a longer period of time. The reasons behind were according to president Draghi low inflation expectations, risk of the growth remain downside as well as unemployment rate and ECB expects that Euro area will face prolonged period of low inflation if not deflation. The Bank of England unchanged its policy but surprisingly our brothers Czechs entered currency wars. Although CNB decided to keep interest rates unchanged it decides on interventions on the foreign exchange market to weaken the koruna so that the exchange rate of the koruna against the euro is hold close to CZK 27.huricane

“Today there is only one country and only one in command: Germany” said Romano Prodi last week. What Europe needs is according to him that ECB should fulfill its inflationary targets by 2 %. Prodi said that Italy is in trouble because of low inflation and that it is trapped in deflationary spiral. Italy has primary budget surplus but its debt to GDP ratio is still climbing due to the unsatisfactory nominal GDP growth. Prodi also urged for creation of “Latin front” against Germany. He claims that Germany is obsessed by low inflation as teenagers are obsessed by sex. There is nothing strange that some Italians claim for lowering of purchasing power of Euro. They did it with their currency before Euro all the time. But as we have emphasized many times these opinions are still stronger and I think that higher inflation times is slowly coming into the Europe; hopefully not end by the word “hyper”.

We had another whole country protests in Greece for 24 hours. Protests were taking place as Greece holds talks with its ‘troika’ of creditors. Labor unions were fear that politicians will impose another wage and pension cuts to meet the terms of the bailout and that they introduce more job cuts in the public sector, as well as privatization. But we are accustomed with these news and we will see more strikes in the near future. That is for sure.

China´s Premier Li Keqiang declared last week that China needs grow at least 7.2 percent annually to create 10 million jobs a year which is necessary for employment as one of the country´s priorities. His remarks were made at a union meeting two weeks ago but were only published in full this week, just days before a pivotal Communist Party plenum to set policy opens. He also warned on easy credit supply, which is about 100 trillion yuan ($16.4 trillion) what means that is already twice the size of China´s GDP. And new credit could cause inflation which is for Chines leaders’ dangerous game in one billion men country. Growth at the peace of 7.2 percent is quite ambitious plan because as we informed you many times China is suspicious to adjust official economic data. There is also news from time to time which supports this theory as for example the one from the last week. Chinese leaders called for stopping expanding industries such as steel and cement in which supply outstrips demand to cut overcapacity of these industries. And as data shows cement manufacturers use only 71.9 percent of their capacity from 2012 and the steel industry use only 72 percent. So as you can see the situation around the growth of GDP is at least cloudy. On the other hand everybody expects introduction of some reforms on their Third Plenum meeting in terms of industry deregulation, financial liberalization, and reforms to land titles, state-owned enterprises and social security. We will see what this meeting brings to the globe.

The most important data for this week from the US were non-farm payrolls. So October nonfarm payrolls soar to 204,000. It was a nearly double digit contrary to the expectations on 120,000. Unemployment rate in the US is at 7.3%, a little bit up from 7.2% in September. Does it mean that FED changes its policy in the near future? It is difficult to tell. But as the UBS warns FED is trapped. According to the UBS the Fed is facing two major risks. First is that premature tapering could disrupt markets and triggers global turmoil across all assets classes with consequence of weakening already weak economy. Second is that if FED delays tapering of its policy of 85 billion purchase program it will fuels creating of asset price bubbles, which could burst eventually and do major damage as well. So you can choose as usually what really happens. Maybe we will witness no tapering at all but increasing of QE. Who knows?

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 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

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