Archív značiek: US debt

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

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


Nothing Has Been Solved

The Euro crisis is not definitely solved. Greece unemployment rate in April 2013 was 26.9% compared to 23.1% in April 2012 and 26.8% in March 2013. The number of employed amounted to 3,636,042 persons. The number of unemployed amounted to 1,337,621 while the number of inactive to 3,337,051. It means that 3.6 million people in Greece are working to support 4.6 million of inactive people. And we had another problem in the country as well. Non-performing loans just surged to €66 billion, amounting to a whopping 29% at the end of March from a „manageable“ 24.2% at end-December. That’s a ridiculous 20% increase in total NPLs in three months that was only exposed due to the Troika’s stress testing!grecko_nepokoje

Portugal’s president threw country into disarray on Thursday calling for early elections next year. President Silva proposed a cross-party agreement between political parties to guarantee wide support for austerity measures needed for Portugal to exit its bailout next year, followed by elections. It was surprise for Prime Coelho who thought he had overcome a cabinet crisis. The 10 Y yields on governmental bonds were automatically almost 8 % which creates unsustainable environment to serve country´s debt.

France is destroying 8,000 jobs a day.” It said Pierre Gattaz, the new leader of business federation in France. It is probably overblown but it illustrates the situation in the country. France is being suffocated by high taxes and an over-regulated system and rising unemployment is direct outcome. Christophe de Margerie, head of the energy giant Total, said it very clearly: “The real problem we have in France is the state. Some 55pc of GDP in the hands of the state, and it is not being very well run. We live in a nanny culture where people expect the state to take care of everything.”

The International Monetary Fund lowered its 2013 global GDP growth forecast to 3.1% from 3.3%. According to IMF US will be down to 1.7% from 1.9% and the euro area GDP to contract 0.6% in 2013, downgraded from the previous estimate of a 0.3% contraction. The revision was made for 2014 as well.

The Japanese government plans to adopt a different measure of inflation. The government plans to use so called „core-core“ CPI which excludes volatile prices of fresh food and ass well as energy costs. The change could result in more pressure being put on the central bank to keep flooding the market with yen as the inflation target becomes harder to achieve. Ok. So it seems to me that inflate to infinity is the government official plan now.

As I mentioned above we had the FOMC minutes and Ben Bernanke appearance. The FOMC minutes have shown that it is very probable that the committee is divided about the present 85 billion bond buy policy and the final confusion came from the chairman who claimed that “Highly accommodative monetary policy for the foreseeable future is what’s needed” which is a little bit contrary to the FOMC minutes. We had a resignation of one member of the committee afterwards when Elizabeth A. Duke submitted her resignation following day which could be a logical response of what the „other half“ of the Fed thinks about present time policy. But who knows.

Guess, do outnumber full-time employed workers in the US the number of Americans who receive food assistance and/or are on disability? Simple answer is not. But do not be so fast. There are 116 million Americans with full-time jobs, which include 21.9 million government workers. The number of Americans who receive some kind of social assistance is 112.5 million. So far so good there are only 3.5 million more Americans with full-time jobs than there are Americans who are reliant on the government. Not very good perspective.

Matúš Pošvanc

China Hides Data

We had two announcements of central banks in the Europe. First was Bank of England with a new boss Mr. Carney. Second was ECB. The Bank of England mentioned that forward guidance and intermediate thresholds would likely be considered at the August assessment which means some change of monetary policy but otherwise there were no changes and the BoE kept rates and QE program unchanged. The Governing Council of the ECB expects that the key ECB interest rates remain at present or lower levels for an (not exactly specified) extended period of time. As you see the same story we heard from Mr. Carney. It is expected that rates will stay low or will be lower at least for 12 month. We have witnessed here some change of the policy of the ECB because it refused to pre-commit anything about rates in the past. This could lead to some currency wars regime between Europe and USA because FED is allegedly considering tightening its monetary policy. But FED could be forced not the change its policy because of actions of ECB and BoE due to the fact that Euro could weaken compared to US dollar which would be negative for the US export activities.

The ECB decided last week that Cyprus’s government bonds are temporarily ineligible as collateral after country´ credit rating was cut by Fitch Ratings and Standard & Poor’s. The central bank said it will reassess the potential eligibility of Cypriot marketable debt instruments upon the conclusion of the bond exchange.

Greece has to reassure Troika that it can deliver on conditions attached to its bailout in order to receive its next tranche of aid in August worth of € 8.1 billion. Greece missed a term placing 12,500 state workers into a „mobility scheme“, under which they are transferred or dismissed within a year to plug a fiscal gap. This could cause that IMF might stop its support to avoid of violating its own rules. But I would not be so afraid that the tranche will not come because we have German election in less than 3 month and Germans are eager to avoid any talk about yet another debt haircut for ailing Greece. Indeed, German Finance Minister Wolfgang Schäuble ruled out such a possibility just last week. Tensions over bailout terms have also mounted in Portugal. Finance Minister Vitor Gaspar resigned on Monday due to the protests against austerity programs. But it is more than obvious that any delays of austerity program will push Portugal towards some sort of further assistance or some form of debt restructuring. Who know maybe we will see finally how the OMT will work and what are its exact rules.

Europeans are furious by revelations that U.S. spied on EU representations in Washington and New York. Some have called for a suspension of talks on the trans-Atlantic free trade agreement. The documents indicate the US intelligence service was more active in Germany than in any other country in the European Union. But tensions were calm very soon and France and Germany have backed down on threats to suspend US trade talks once US promised to create more groups which will deal with the data protection.

china_hidingSo will it be China which trigger a new global economic problem or not? Difficult to tell but there are coming still interesting news from China. China suspended the release of industry-specific data from a monthly survey of manufacturing purchasing managers last week. So it seems that China is not only manipulating economic data it starts not releasing them. China´s shadow banking reached $ 6 trillion or 69 % of country GDP and regular banks works as intermediaries within the system. E.g. last month many wealthy Chinese received text message promoting 6 % return (far above official rate 3.3 %) on special financial product with 90 day duration. The problem with the shadow banking in China is that almost nobody knows where money is invested and some are wondering if these products are not some kind of Ponzi scheme.

Non-farm payroll data were released on Friday which were + 195 000, more than expected; the unemployment rate stayed at 7.6% despite expectations of a drop to 7.5%. Prior to this report ADP private payrolls data were released which were positive as well. During the month of June, the U.S. private sector added 188,000 jobs, driven by gains across all sizes of businesses, and with small companies showing the largest overall monthly increase. So far good news? It would be if full time jobs were not down by 240 K and part time jobs were not up by 360 K. But what do they cause? Will the FED change its policy? My bet is that there will not change but only time tells us.


Matúš Pošvanc