Old and still drinking water and eating dry white toast.
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Japan To Buy Eurozone Debt To Help Europe Tackle Debt-Crisis
TOKYO (Dow Jones)--Japan on Tuesday said it plans to buy debt to be issued by the European Financial Stability Facility later this month in a bid to help prevent the European debt crisis from growing further.
"The euro zone is planning to issue a large amount of bonds in a cooperative manner late this month to raise funds to assist Ireland, and it is appropriate for Japan, as a major economy, to buy some of the EFSF bonds to bolster confidence" in Europe's efforts, Finance Minister Yoshihiko Noda said at a news conference.
"We're thinking about buying more than 20% of the amount" of EFSF securities to be issued in the initial round, he said.
The EFSF in 2011 plans to raise up to EUR16.5 billion and in 2012 up to EUR10 billion. It intends to launch three benchmark bonds next year with each transaction involving EUR3 billion to EUR5 billion. The plan is subject to revision, and Japanese government officials told Dow Jones Newswires that they were mindful of recent media reports that the amount of the initial round of issuance this month could be EUR8 billion.
But the move may not have a direct impact on the euro's exchange rates, as Noda indicated that the Japanese government will use some of the euros held in its foreign reserves for the purchases.
"We'd like to do this within the realm of euro liquidity in the foreign currency reserves," Noda said.
If this month's bond sales come to around EUR3 billion to EUR8 billion, "we'll be able to easily handle this using (euros in) the foreign reserves," one of the government officials said.
The Japanese move reflects the government's concern over the potential damage that could be inflicted on the nation's export-reliant economy if European economies deteriorate because of the debt turmoil.
The official added that Japan has yet to decide whether to buy EFSF securities in the subsequent rounds of EFSF issuance.
Japan's foreign-currency stockpile stood at $1.096 trillion last month---the world's second largest reserve after China's. While most of the reserves are believed to be held in U.S. Treasurys, Japan, like many other nations, has kept under wraps the currency composition of the reserves.
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Time for a beer run
Beer Run
The Ongoing Portuguese Debt Crisis
New year, new crisis. For the beleaguered, once-independent nations of Europe now entangled in the eurozone, the economic drama unfolding in Portugal this week looks woefully familiar. According to the latest speculations in the financial press, the Portuguese government is now under pressure from other European governments to accept a bailout from the EU, much like what happened with Ireland last fall. As with Ireland, Portugal is now denying the need for any bailout, insisting that she can solve her own problems with spending cuts, tax hikes, and other budgetary modifications.
Bond investors were spooked over the weekend by a spike in Portuguese bond yields, which soared briefly to above 7 percent -- a rate of return that would certainly force the Portuguese government into default. All eyes are now on this Wednesday’s sale of 3- and 9-year Portuguese bonds, for which Lisbon must find buyers if it to finance $26 billion in public accounts this year.
We’ve seen this dreary pageant already, with Iceland, Greece, and Ireland, as the EU’s financial führers continue to kick the can further and further down the road to continental insolvency, hoping that monetary sleight of hand from the European Central Bank (ECB) can postpone the evil day indefinitely.
What the Europeans are hoping to avert — yet again — is dreaded “contagion,” whereby the problems of smaller economies like those of Greece and Portugal spill over into larger ones, like Spain and Italy. Portugal, after all, only accounts for about 2 percent of the EU’s economic output, whereas Spain’s economy amounts to a whopping ten percent of the European whole.
The truth is that the entire eurozone is insolvent, and that “contagion” is not some perceptual nuance that can be staved off by careful propaganda and a couple of bailouts. It is actually the slowly-unfolding realization that, in the not-so-long run, many of the governments in Europe, including several linked to very large economies (Spain and Italy) simply will not be able to honor their obligations to debt holders, and the rest of the eurozone — indeed, the world — does not have the funds to bail them out. The result will be large scale default on all kinds of debt and a worldwide financial earthquake that will dwarf the panic of fall 2008.
In the meantime, the Portuguese, the Spanish, and the rest of Europe are still desperately hoping that somehow, this time around, the laws of economics will somehow fail to apply, and what has become dizzying downward spiral of more and more debt to finance existing debt will be magically transformed into a miracle of economic growth and solvency. The Chinese government, ever eager to take advantage of fiscal weakness in Western countries, has already purchased Greek and Spanish debt, and may be poised to do the same for Portugal. The ECB has apparently been buying up Portuguese bonds in attempt to drive down the yield.
But in the end, market forces, embodied by the purchasers of European government debt, will determine the fate of the eurozone and the economies that it holds captive. The tipping point will probably be the implosion of an economy, like Spain’s, that the rest of the world is unwilling and unable to rescue.
In the near term, Wednesday’s bond sale could be a major event, because it could have a significant impact on Thursday, when Spain and Portugal attempt bond sales of their own. Should bond purchasers get cold feet, next week’s meeting in Brussels of eurozone finance ministers could be carried out in an economic tempest.
The world’s financial elites are well aware what is at stake. As the AP’s Barry Hatton and Pan Pylas pointed out Monday, “The prevailing view in the markets is that Europe may be able to support Portugal but that a bailout of Spain would test the limits of the existing bailout fund, potentially putting the euro project itself in jeopardy if governments don't put up more cash.”
And looming beyond the potential collapse of the euro and even the European Union itself, there is another, even larger debtor nation caught in the same spiral of heaping new debt upon old, a nation whose government has lived beyond its means for decades while expecting the rest of the world to be its creditor. But will the United States learn from the European debacle, or will we continue unrepentantly robbing Peter to pay Paul, and hoping – as Greece, Ireland, Portugal, Spain, and the rest of Europe have done – that the day of reckoning will never come?
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Euro Nears Three-Month Low on Sovereign Debt Sales, Oil Jumps
Jan. 10 (Bloomberg) -- The euro traded near a three-month low against the yen, and bond risk rose in Asia, on speculation European nations will struggle to raise money in debt sales this week. Oil rallied after the closure of an Alaskan crude pipeline.
The euro weakened against 13 of its 16 most-active peers and fell to 107.23 yen as of 11:09 a.m. in Tokyo from 107.32 on Jan. 7. The Markit iTraxx Asia index of credit-default swaps on 50 investment-grade borrowers rose for a fourth day. The MSCI Asia Pacific excluding Japan Index was little changed at 477.36 following a 0.3 percent drop last week. Crude climbed for the first time in three days, adding 1.8 percent to $89.63 a barrel.
Portugal, Spain and Italy are scheduled to sell debt following a slump in euro-area government bonds last week, triggered by concern over the European Union’s ability to stem the crisis. Increasing prices for raw materials added to speculation inflation will accelerate in Asia, with a Bank of Korea report today showing that producer prices climbed in December at the fastest pace for two years.
“It looks as though the market is pricing in some further deterioration in the sovereign debt story,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “The Portugal auction on Wednesday will be closely watched. I see euro weakness continuing.”
The euro touched 106.95 yen on Jan. 7, the lowest since Sept. 14. The single currency traded at $1.2900 from $1.2907, after earlier dropping to $1.2867, the weakest since Sept. 14.
Portugal, Spain Sales
Portugal will sell 2014 and 2020 bonds on Jan. 12 before Italy offers 2014 bonds and Spain auctions 2016 debt on Jan. 13, according to data compiled by Bloomberg. The yield on Portuguese 10-year bonds climbed as high as 7.19 percent on Jan. 7, the most since Nov. 11. The yield on Spain’s 10-year bonds reached 5.54 percent last week, the highest since Dec. 21.
Amid the slump in bonds of Europe’s most indebted nations, Germany may be softening its opposition to expanding the continent’s 750 billion-euro ($966 billion) rescue facility. EU leaders may discuss expanding the fund at their next summit in February, the Handelsblatt newspaper said, citing German officials it didn’t identify. Der Spiegel said the EU could time such a pledge to coincide with granting aid to Portugal.
The Markit iTraxx Asia index climbed 2 basis points to 111 basis points, heading for its highest close since Nov. 30, according to Credit Agricole CIB and data provider CMA. Default risk also increased in Australia, with the Markit iTraxx Australia index rising 3 basis points to 112, Credit Agricole prices show.
Australian Insurers
About the same number of stocks advanced and declined on the MSCI Asian index. Financial markets in Japan are closed today for a public holiday. Suncorp Group Ltd. and Insurance Australia Group Ltd. fell at least 1 percent, leading Australian insurers lower after flooding in Queensland worsened.
Futures on the Standard & Poor’s 500 Index slid 0.1 percent. The gauge declined 0.2 percent on Jan. 7 after a government report said U.S. payrolls increased by 103,000, about two-thirds of the median estimate in a Bloomberg survey of economists.
After the release of the data, Federal Reserve Chairman Ben S. Bernanke said in testimony to the Senate Banking Committee that the labor market may take five years to normalize. Vice Chairman Janet Yellen said yesterday that central bank asset purchases prevented the country from slipping into deflation and will add 3 million jobs to private payrolls.
Crude for February delivery rallied as much as 2.2 percent on the New York Mercantile Exchange after the Trans-Alaska Pipeline System, which carries about 15 percent of U.S. crude output, was closed Jan. 8. The shutdown of the pipeline, an 800- mile network crossing the northernmost U.S. state, forced companies including BP Plc to suspend 95 percent of production in the North Slope area.
Inflation Risks
Producer prices rose 5.3 percent from a year earlier, the biggest gain since December 2008, compared with a 4.9 percent increase in November, the Bank of Korea said in Seoul today. Four out of nine economists surveyed by Bloomberg News expect a 0.25 percentage point increase to 2.75 percent at a monetary policy meeting Jan. 13. The won rose 0.3 percent to 1,118.63 per dollar from 1,115.95.
“If you have the U.S. Fed staying on the sidelines and the economy doing reasonably well, at least in the near term, commodity prices will keep spiraling up,” Venkatraman Anantha- Nageswaran, global chief investment officer at Bank Julius Baer & Co., said in a Bloomberg Television interview in Singapore. “Asian central banks are going to remain cautious in hiking interest rates. Inflation risks are going to be much larger.”
Euro 3M Low
Freight Rates Tumbling as 35 Miles of Ships Passes Ore Demand
Jan. 10 (Bloomberg) -- At a time when analysts anticipate record profits for the biggest mining companies and a third year of gains in commodity prices, shipping lines carrying raw materials are set for the lowest freight rates since 2002.
Leasing costs for capesizes, 1,000-foot-long ships hauling iron ore and coal, will drop 34 percent to average $22,000 a day this year, according to the median in a Bloomberg survey of eight fund managers and analysts. The last time that happened, China’s economy, the biggest consumer of the minerals used in steel and power, was 75 percent smaller and the benchmark Standard & Poor’s GSCI commodity index 67 percent lower.
While Clarkson Plc, the world’s biggest shipbroker, expects seaborne trade in the two cargoes to exceed 2 billion metric tons for the first time this year, the 7 percent increase won’t be enough to eliminate a glut. About 200 capesizes, spanning some 35 miles end-to-end, will leave shipyards this year, expanding the fleet by 18 percent, the Bloomberg survey showed.
“The market was able to take a punch in the face in the form of 200 capesizes and loads of smaller vessels last year but I doubt it will manage another punch without having to hit the deck,” said Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in Oslo who correctly forecast in July that rental costs would more than triple by the fourth quarter.
Rates averaged $34,913 a day in the final three months of 2010, 33 percent more than in the previous quarter. Tariffs are already plunging, dropping 36 percent last week to $12,897, as ships leave yards in China, Japan, the Philippines and South Korea, according to data from the London-based Baltic Exchange, which publishes assessments for more than 50 shipping routes.
Dry Ships
The Bloomberg Dry Ships Index of 12 shipping lines has yet to react, declining 0.9 percent last week. Prices in the shipping market are more volatile that stocks and bonds, with rates moving 10 percent or more in 32 weeks last year.
While about 90 percent of global trade moves by sea, according to the Round Table of International Shipping Associations, the slump in rates is being caused by a vessel surplus not a contracting world economy.
Global seaborne iron-ore shipments will increase 7.5 percent to a record 1.04 billion tons this year and coal shipments 6.7 percent to an all-time high of 978 million tons, London-based Clarkson forecasts. China’s gross domestic product will expand 9 percent, three times the speed of the U.S., according to the median of as many as 68 economist estimates compiled by Bloomberg.
Global Recession
The surplus was caused by orders placed in 2007 and 2008, when daily income averaged about $111,000. Rates reached a record $233,988 in June 2008 before plunging 99 percent over the next six months to $2,316 as economies entered the first global recession since World War II. In 2009, tariffs more than quadrupled as growth rebounded.
Even at an average of $22,000, ship owners should be able to make money, with average daily expenses last year of about $15,000 for costs including crew and depreciation, Clarkson estimates. While the figure doesn’t include payments on loans, interest rates for many companies have dropped since the Federal Reserve cut its benchmark interest rate to near zero in December 2008 and kept it there since.
Profit growth isn’t keeping up with the wider economy, with six of the 12 shipping lines in the Bloomberg Dry Ships Index expected to report lower earnings this year, according to analyst estimates compiled by Bloomberg.
Anticipated Growth
A measure of combined earnings per share across the index is forecast to drop 7.5 percent this year, compared with anticipated growth of more than 18 percent in the Standard & Poor’s 500 Index, according to data compiled by Bloomberg using analysts’ forecasts.
The winners include STX Pan Ocean Co., South Korea’s biggest bulk-shipping line, which will earn 796 won (71 cents) a share this year, from 514.6 won last year, the mean of 23 analyst estimates shows. The company said in November it would spend $1 billion on new ships after winning long-term delivery contracts for wood pulp and coal.
Companies such as Athens-based Diana Shipping Inc. and Navios Maritime Holdings Inc. have vessels on longer-term contracts, making them less exposed to spot rates, said Natasha Boyden, a shipping analyst at Cantor Fitzgerald LP in New York.
As recently as two months ago, ship owners were signing one-year charters at $33,000 a day, more than double today’s spot rate, according to data from Clarkson.
Six Estimates
Diana Shipping’s earnings per share will decline to $1.518 this year, from $1.595 in 2010, according to the mean of 12 estimates. Profit will drop to 97.5 cents a share from $1.055 at New York-based Navios Maritime, the mean of six estimates shows.
Nippon Yusen K.K., Japan’s largest shipping line, has longer charters in place and “won’t be affected that much by the drop in bulk rates,” President Yasumi Kudo said in an interview in Tokyo Jan. 5. The company, based in that city, will report earnings of 43.5 yen a share in its fiscal year ending in March and 42.4 yen a year after, based on the mean of 18 analyst estimates compiled by Bloomberg.
Some owners are counting on better returns from container ships in their fleet to compensate for the drop in dry bulk. An index from the Hamburg Shipbrokers’ Association reflecting charges for six types of container carriers more than doubled last year.
Merchant Fleet
While dry bulk rates could “drop a little” this year, “container shipping is doing well,” Koichi Muto, president of Mitsui O.S.K. Lines Ltd., told reporters in Tokyo on Jan. 5. The company, operator of the world’s largest merchant fleet, got about a third of its revenue from containerships in its last fiscal year, data compiled by Bloomberg show. Shares of Mitsui, based in Tokyo, advanced 13 percent last year.
Even shipping lines with longer charters or a mix of vessels could be hurt because a prolonged slump in rates can hurt asset prices. The cost of a five-year-old second-hand capesize dropped to $53.2 million in December, from as much as $61.4 million in June, Baltic Exchange data show. Analysts use ship prices to assess company valuations and they can also be part of conditions attached to loans.
The shipping lines are already lagging behind the suppliers of the iron ore and coal they carry in the stock market. The Bloomberg Dry Ships Index fell 21 percent in the last 12 months, compared with a 14 percent jump in the 100-member Bloomberg World Mining Index. Vale SA, Rio Tinto Group and BHP Billiton Ltd., the world’s three-largest iron-ore exporters, will report the most profit ever this year, according to the median of analyst estimates compiled by Bloomberg.
Raw Materials
Every one of 15 raw materials covered in a Bloomberg survey of more than 100 analysts, traders and investors in December was forecast to advance this year. The S&P GSCI gauge of 24 prices rose 20 percent in 2010, extending the previous year’s 50 percent jump.
Demand for commodities is booming as economies accelerate. U.S. growth will reach 3.25 percent in the final three months of the year from 2.5 percent this quarter, according to the median of as many as 66 economists’ estimates compiled by Bloomberg. The Fed is injecting $600 billion into the financial system through June by purchasing government bonds through so-called quantitative easing. It already bought $1.7 trillion of securities in a first phase that ended in March.
Even with the trillions of dollars being pumped into economies by governments and central banks, new capesizes joining the existing fleet of about 1,100 vessels will struggle to find enough orders to drive rates higher.
“The big problem for 2011 is continued deliveries of new ships,” said Scott Burk, an analyst at Oppenheimer & Co. in New York who was the most accurate forecaster of fourth-quarter capesize rates in Bloomberg’s survey in July. “It puts a damper on any upside that would occur through an increase in demand.”
Freight Rates
Watch the Swap spreads as a leading indicators of systemic risk.
Next week the Greek are selling 6-month notes, hopefully we will see some monetary salting of the mine.
...the world is a better place will all of the f'reserve made bubbles
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May NOT be a blessing for the other shipping companies
I've been watching Genco Shipping & Trading Limited (Public, NYSE:GNK)for the last few months.
“There’s no doubt it’s going to be bearish,” said Stuart Rae, joint managing director of M2M Management Ltd., a London- based hedge-fund group that operates about 65 commodity transporters and trades freight derivatives. “It’s going to exacerbate a market that was already squirming.”
Queensland exports about 180 million metric tons of coal a year, or about a fifth of the global total, according to Sverre Bjorn Svenning, an analyst at Fearnley Consultants A/S in Oslo. The dry-bulk fleet expanded by 17 percent last year, outpacing an 11 percent increase in haulage demand, according to the research unit of Clarkson Plc, the world’s biggest shipbroker.
$18,697 a Day
So-called capesize vessels, the largest tracked by the Baltic Exchange, led declines today as daily rental rates slid 6.6 percent to $18,697. Costs fell 2.7 percent to $14,312 for panamaxes, lost 4.8 percent to $14,860 for supramaxes, and declined 2.9 percent to $11,805 for handysizes.
Total seaborne trade in dry-bulk cargoes, spanning commodities including coal, iron ore and grains, totaled 3.3 billion tons last year, London-based Clarkson estimates.
Queensland coal buyers already invoked force majeure, a legal clause giving them the right to cancel charters, according to Rae. The release of ships from charters will increase competition among owners for cargoes, he said.
Producers of power-station coal in Indonesia and South Africa are unlikely to have time to increase their output, potentially generating alternative vessel demand, because the Queensland disruption probably will be too short, according to Svenning at Fearnley.
Economists Say Europe Faces Low Growth For A Decade
WASHINGTON -(Dow Jones)- Europe's currency project will probably survive, but the price paid by the euro zone area is likely to be dismal economic growth for the next decade.
The verdict comes from economists gathered here from around the world for the annual meetings of the American Economic Association, which run Jan. 7 to Jan. 9.
"The most probable scenario is that Europe will just muddle through," said Pascal Petit, from the Centre d'Economie de Paris Nord of the University of Paris.
With European countries forced to take austerity measures to stem market fears about surging public debt levels and a central bank focused more on controlling inflation than boosting growth, economists believe the 17-country area cannot escape continued low growth.
The "catastrophic" scenario outlined by Petit, in which the euro disintegrates, is unlikely because the costs would be too high for all the countries involved. An "optimistic" outcome, in which Europe overhauls its institutions and allows for more fiscal unity, also has a small chance of making it because better-off countries like Germany don't want to pay for the fiscal profligacy of countries like Greece.
Last year, high sovereign debt levels in Greece and a banking crisis in Ireland forced both countries into tapping a trillion-dollar rescue fund set up by the European Union, with help from the International Monetary Fund. Some analysts fear Portugal and even Spain--the euro bloc's fourth-largest economy-- could stumble soon.
Both countries are expected to have to come to market with big bond deals. Spain's central and regional governments, for example, will need to raise roughly EUR200 billion in 2011 and the country's banks an additional EUR90 billion, according to Moody's Investors Service.
Although there could be renewed tensions, European leaders are expected to find ways to ensure the common currency survives, because giving up would just be too costly. It would undermine 60 years of political efforts to build a united and peaceful Europe, and could cause unpredictable economic and financial disruption in a region whose trade and banking systems have become deeply intertwined since the euro was created in 1999.
"The euro is more than just a currency. A united Europe is the guarantor for our peace and our freedom. Germany needs Europe and our common currency, for our own good, and for coping with global challenges," German Chancellor Angela Merkel said in her televised address to the nation marking the start of the New Year.
A.G. Malliaris, an economics professor at the Loyola University Chicago, sees only a 5.0% chance that the euro won't make it. University of Cambridge economist John Eatwell also believes Europe's single currency will eventually scrape through--even though the cost will be dismal economic growth for years to come.
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2011 – Living in hope
For the start of 2011 we believe the markets will live in hope that the momentum of global economic growth built in the fourth quarter will carry us through the year, overcoming all problems. By the end of 2010 we would have hoped that the world’s problems would be resolved. However as we turn the corner into 2011 many issues remain unresolved and indeed further problems have been added to the list of structural and cyclical issues that confront the financial markets. As the year progresses we believe that the markets will still have to confront the structural issues in the world - high consumer debt in the West, commodity price inflation, political disarray in Europe and a still weak financial sector in Europe and the US. At the end of 2011 many of the issues may remain unresolved however it should not have stopped investors from making some modest gains in equities and commodities in particular.
Strong US economic data in the fourth quarter of 2010 has set the scene for an optimistic opening to 2011 for the financial markets. Many of the US economic indicators for the manufacturing sector are showing a vibrancy not seen in some years. The near term outlook is helped by generally stronger economic growth in many parts of the world through the fourth quarter. Even in Europe as the year closed the weakness of the Euro is providing a timely support for the core of Europe with Germany and France reporting cycle high industrial confidence and strong corporate profits growth.
For 2011 to be a resounding success in the financial markets requires investors to believe in the sustainability of the global economic recovery. A second half to 2011 that is resplendent in US growth is still a leap of faith. The structural problems of the old world of the West have still not gone away. The US housing market is still mired in problems with a general lack of confidence in housing as an investment, a lack of available funds in the mortgage market and higher mortgage rates all working against the US housing market. Part of the problem of the housing market is the lack of jobs growth and the still high levels of unemployment in the US. Without good employment prospects, fewer people are prepared to buy new home or upgrading their existing home. Without additional demand for residential properties house prices will remain mired at around current low levels. As the year ended there was some good news from the jobs market with US initial jobless claims falling to the lowest levels since July 2008.
The demise of the Eurozone as a cohesive economic zone remains one of the significant unresolved issues for 2011. The Eurozone has bought time with a series of short-term measures to bolster individual countries aka Greece and Ireland. However there will be a considerable challenge to the Eurozone in the first half when over €500 billion of government debt comes up for refinancing. If the Eurozone were a truly integrated economic zone transfers of funds across borders would provide significant relief for countries that have suffered economic melt-down. In the current situation individual countries have to fend for themselves with only the support of soft guarantees that have a finite time limit. A significant political chasm has opened up between Germany and a number of the other countries as Germany has baulked at committing too much to the countries in trouble. Spain may end up being the acid test of the union in the Eurozone. Over the coming couple of years BNP estimate that Spain will have a financing shortfall of €340 billion. In a crisis the IMF and the Eurozone could probably make good the financing over the next two years but at the cost of considerable political turmoil in Europe and generally higher long term interest rates for the region.
A strong global economy works hand in hand with a strong financial sector. However as we enter 2011 doubts remain about the strength of the US and European financial sectors. If you look back at 2010 many of the major US banks performed poorly weighed down by ongoing issues such as their mortgage books, the capital requirements of the Basle III initiative and a general anti-bank attitude from the legislators. European banks will have to refinance around €400 billion of debt in the first half of 2011. Indeed both the ECB and the Bank of England have warned that the banks will be competing hard for funds in early 2011.
We expect commodity prices to head higher in 2011. In the oil market, global demand continued to accelerate through 2010 as strong emerging market was increasingly reinforced by strong developed market demand as the US economy strengthened. Aggregate demand is running at close 1m barrels a day (b/d) higher whilst aggregate supply growth has risen by a modest 250,000 b/d year-on-year. In agriculture the weather has played havoc with 2010 forcing prices higher and with inventories consequently low further price spikes are possible. Also the scare of the price increases in 2010 is leading many companies and countries to increase strategic stockpiles of agricultural product that may lead to even greater volatility than seen in 2010. In industrial metals stronger global demand is meeting in many instances still well supplied markets. Aluminum, Nickel, Zinc and lead are all expected to see strong supply growth in 2011 possibly outstripping demand growth.
Higher commodity prices could provide quite a challenge for central banks in 2011. In many parts of the world current inflation is running well ahead of central bank targets causing a dilemma for policy makers. If central banks do nothing they may be accused of being weak in the face of the risk of persistently high inflation. If they increase interest rates they may risk tightening too early and killing off the nascent growth.
As we enter 2011 we remain positive on equities and commodities. In equity markets we are indifferent between emerging markets and developed markets. Developed markets may have the upper hand initially as strong corporate profits growth for the fourth quarter and still low valuations provide support. Emerging markets, have strong long term growth prospects, however they face inflation risks that will require ongoing restrictive monetary policy for 2011. Commodity markets as we argued earlier, offer good near-term returns particularly in the sub sectors of energy and agricultural product.
MENA markets have considerable upside should a more sustained rally occur in global financial markets. Valuations are low and the markets have generally been overlooked by international investors. The main challenge will come from ongoing refinancing of companies. As long as global liquidity remains available the outlook should be a positive one. If the global bond markets hit a more significant problem with yields spiralling higher then returns could be more modest.
The most challenged asset will be developed market bonds. Stronger growth and inflation coupled with the current wave of refinancing has forced yields higher. Central banks will be mindful that although some of the increase in bond yields is a positive reflection of a more robust global economy, were rates to move too high global growth prospects could be compromised. Central Banks will probably aim to use quantitative easing to restrain too significant a sell-off of bonds.
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A Bet Against Europe Is A Bet Against Global Economy
Several sources report that credit default swaps on the debt of some EU nations has reached record levels. The cost to insure against default of Ireland and Spain’s debt rose particularly high. This is not supposed to happen. Aid packages are supposed to make it certain that these countries will get proper financial support from their neighbors and to a lesser extent the IMF
There are some compelling arguments that where the European economy goes the world’s will follow. There are cases that say this is not true. Europe cannot be viewed as a whole, these troubling theories say. Problems in Greece do not mean trouble in Germany or France. These two healthy nations could flee the alliance and revert to their own currencies. That would leave the weaker nations on their own to be savaged by global institutional investors. Borrowing costs for these stragglers would go so high that default would be likely. Some investors and banks would take huge losses. Those may not be enough to cause a new credit crisis.
Some believe Europe is not the important region that it used to be. That is a false view. The EU is still larger than the US in GDP. China, America, and other large exporters would be deeply wounded financially by a slowing in the already weak economies in the region. New austerity measures and taxes might need to be pressed harder in nations which face defaults. Much of the region could be thrown back into deep recession.
The focus of global capital markets has oddly fallen on the debt of two regions. One is the strongest paper in the world–America’s. The other is the paper of the troubled EU countries. Investors are worried that Congress will not raise the debt cap which would put the US into a technical default on its sovereign paper. The other could crush the prospects of some large part of Europe. Europe’s problems are real. America’s are not, at least for the time being. That means the attention of the debt markets will turn to Europe again soon.
The idea of decoupled national economies has been a popular one for some time. It may always have been a hollow theory. It certainly is now. Europe is the large domino at the beginning of a line that could fall. The region has too many financial and trade ties to the rest of the world.
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China's influence in Europe
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Time to Prepare for a Greek Default?
Swap spreads tend to be good leading indicators of systemic risk. Swap spreads started rising in the second half of 2007, for example, fully one year before the 2008 financial crisis hit.
So it is troubling to see that European swap spreads have been trending higher in recent months, even as U.S. swap spreads have been relatively low and flat (top chart).
Swap spreads in both markets surged last May, when Greece teetered on the verge of default. U.S. spreads settled back down, however, as it became apparent that a sovereign default, if it occurred, would be small potatoes for the huge U.S. economy.
Now Greece is back in the news, as yields on 2-yr Greek government debt have risen to a post-crisis high (second chart). Other PIGS are in trouble as well (Portugal, Ireland and Spain), but Greek government yields and credit default swaps tower over those of the other countries facing the risk of default.
So despite the costly efforts of other Eurozone nations to bail out Greece, the market seems to be saying that a default of some magnitude is unlikely to be avoided.
I would brace for that, even though I doubt it would have much of an impact on the global or the U.S. economy. The fact that the euro is only marginally weaker against the dollar in recent months, and European stocks are near their highs, I think confirms that a Greek default won't be an earth-shattering event.
With luck, markets have had enough time to price in this grim reality, so when it actually happens the impact won't be too painful.
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Europe faces a decade of dismal economic growth
EUROPE'S currency project will probably survive, but the price paid by the euro zone is likely to be dismal growth for the next decade.
The verdict comes from economists gathered here from around the world for the annual meetings of the American Economic Association, which run January 7 to January 9.
"The most probable scenario is that Europe will just muddle through," said Pascal Petit, from the Centre d'Economie de Paris Nord of the University of Paris.
With European countries forced to take austerity measures to stem market fears about surging public debt levels and a central bank focused more on controlling inflation than boosting growth, economists believe the 17-country area cannot escape continued low growth.
The "catastrophic" scenario outlined by Mr Petit, in which the euro disintegrates, is unlikely because the costs would be too high for all the countries involved.
An "optimistic" outcome, in which Europe overhauls its institutions and allows for more fiscal unity, also has a small chance of making it because better-off countries like Germany don't want to pay for the fiscal profligacy of countries like Greece.
Last year, high sovereign debt levels in Greece and a banking crisis in Ireland forced both countries into tapping a trillion-dollar rescue fund set up by the European Union, with help from the International Monetary Fund.
Some analysts fear Portugal and even Spain -- the euro bloc's fourth-largest economy -- could stumble soon.
Both countries are expected to have to come to market with big bond deals. Spain's central and regional governments, for example, will need to raise roughly €200 billion ($259bn) in 2011 and the country's banks an additional €90bn, according to Moody's Investors Service.
Although there could be renewed tensions, European leaders are expected to find ways to ensure the common currency survives, because giving up would just be too costly.
It would undermine 60 years of political efforts to build a united and peaceful Europe, and could cause unpredictable economic and financial disruption in a region whose trade and banking systems have become deeply intertwined since the euro was created in 1999.
"The euro is more than just a currency. A united Europe is the guarantor for our peace and our freedom. Germany needs Europe and our common currency, for our own good, and for coping with global challenges," German Chancellor Angela Merkel said in her televised address to the nation marking the start of the New Year.
A.G. Malliaris, an economics professor at the Loyola University Chicago, sees only a 5 per cent chance that the euro won't make it.
University of Cambridge economist John Eatwell also believes Europe's single currency will eventually scrape through -- even though the cost will be dismal economic growth for years to come.
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Is Europe back? Maybe, with China's help.
BRUSSELS, Belgium — After months of doom, gloom and predictions of the euro’s impending demise, you might think the prospect of good economic news from Europe was as likely as pigs taking flight.
The first working days of 2011 were therefore bit of a surprise.
There were reports that China had pledged to spend billions buying up the bonds of Spain and other debt-ridden eurozone nations — a clear sign of Beijing's confidence in the Europeans' ability to pay back the loans.
Then there was the rush to scoop up the first tranche of bonds issued by the European Union to finance an 85 billion euro ($111 billion) bailout for Ireland. It took less than half-an-hour to sell 5 billion euros in bonds, with Asian investors again taking the lead.
Ireland also helped itself with the news that surging exports had boosted corporate tax revenues by 700 million euros, 21 percent more than the government had predicted.
Germany continued to bounce back. Europe’s biggest economy is set to record 3.6 percent growth over 2010, the best figures since reunification two decades ago. Retail sales made their biggest gains in five years and German manufacturing companies saw orders surge by 5.2 percent.
It all seems too good to be true — of course the news hasn’t been all rosy.
On Friday, EU figures showed eurozone third-quarter growth figures lower than expected at just 0.3 percent down, half the U.S. rate and down from 1 percent in the previous three months. The currency slumped to a four-month low against the dollar.
Top of the eurozone worries is Portugal, which was forced Friday to pay a record 7.25 percent interest on its 10-year government bonds by investors who fear that it won’t be able to honor its debts. Portuguese borrowing costs shot to a record-high on Friday ahead of next week's bond auction, further intensifying worries.
The Portugese government says its austerity budget will put public finances back on track, but next week could prove a key test of confidence as the country tries to raise 1.25 billion euros on the markets. Some economists are saying Portugal should already make use of the EU’s 750 billion euro rescue fund.
The fund was set up last year after revelations of the dire state of Greece’s public finances sparked a crisis which spread to other eurozone nations.
Although the EU joined with the International Monetary Fund to bail out Greece to the tune of 110 billion euros in May followed by the 85 billion euro rescue of Ireland in November, claims that tensions within the eurzone could pull the currency apart have persisted.
They are fueled by concern that Germany and other more successful eurozone nations will be unwilling to continue pumping money into the weaker members.
While those concerns may be exaggerated, China’s support in the meantime has been welcome in Athens and Madrid.
Beijing has around 2 trillion euros in foreign reserves, so undoubtedly has the monetary muscle to help Europe out.
It’s also keen to avoid economic uncertainty in its biggest export market; wants to diversify its bond investments away from the $907 billion it holds in U.S. government paper; and is keen to reverse the euro’s slide on currency markets, which have made European exports more competitive with Chinese goods.
“China’s support of the EU’s financial stabilization measures and its help to certain countries in coping with the sovereign debt crisis are all conducive to promoting full economic recovery and steady growth,” Li Keqiang, China’s influential vice premier wrote in Germany’s Sueddeutsche Zeitung during a European tour this week.
China may also seek a political quid pro quo. Beijing wants the EU to grant it market economy status and also seeks an end to a European arms embargo dating back to the 1989 crackdown in Tiananmen Square.
Europe is certainly hoping for more Chinese help, but in the end its own efforts will decide the euro’s fate in 2011.
The optimists’ scenario has austerity budgets in Greece, Ireland, Spain and Portugal, backed by a more permanent support mechanism approved by EU leaders in December, eventually calming the markets.
Despite last years’ spate of lurid headlines about the euro’s looming collapse, German officials recognize that the country has more to lose from a breakup of the eurozone than from bailing out its partners, at least for as long as they stay on the path of fiscal responsibility.
Likewise few mainstream politicians in Greece or Portugal believe that resurrecting drachmas or escudos would calm jittery markets.
The euro got a vote of confidence on New Year’s Day, when Estonia became the 17th EU nation to adopt the currency.
Estonia may be small, but it’s arguably the EU’s best-run economy. Growth is expected to hit 4.4 percent this year, the budget is close to balance and public debt is just 8 percent.
“What the euro means to us is security,” Prime Minister Andrus Ansip told the nation after withdrawing his first euro bills from an ATM in Tallinn.
“We are now a full member of the second biggest financial region in the world, with all the advantages and obligations that brings.”
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“Sovereign Risk Report” Ranks Greece as Most Risky Nation
Greece tops the list of the ten most risky sovereign countries seen as most likely to default on debt and unable to honor its debt obligations.
In the report “Sovereign Risk Report for Q4 2010? released by world’s leading credit default swap (CDS) pricing service, CMA of London, Greece is followed by Venezuela, Ireland and Portugal.
The rankings are based on CMA’s calculations, which include the cumulative probability of default.
Greece, which received a 110 billion euro European Union-led bailout last May, pipped Venezuela as the world’s riskiest sovereign.
It had been in the list’s top 10 throughout 2010.
Greek five-year credit default swaps were quoted at 1,026.5 basis points at the year’s end.
This means it cost just over $1 million to insure exposure to $10 million of Greek debt over a five-year period. The CDS rose 32% in the fourth quarter, CMA said.
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Sovereign Risk Report
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Big Week Ahead for Euro Zone
FRANKFURT—The eurozone debt market faces another big test next week as fiscally-weak governments prepare a deluge of new bond issues even as worries about default risk increase. Market watchers expect the yields demanded by investors to rise sharply from previous offers as a premium.
"In our view, next week's market attention will be mainly focused on EMU [euro-zone] peripherals' supply as the market has already shown renewed interest for highly-rated paper this week," said Annalisa Piazza, an economist at Newedge in London.
After Greece's €1.5 billion sale of 26-week treasury bills, or short-term debt, Tuesday, Portugal will sell government bonds Wednesday, followed by Spanish and Italian bond sales Thursday. Greece's €110 billion bailout package has been cushioning the time frame of the country's monthly treasury bill sales, stripping out the risk element from the tender.
Investors will closely watch Portugal's tender to see how much further its yields rise as there is deep concern about the sustainability of the country's current funding costs.
Ten-year Portuguese yields traded above 7% Friday, hit by supply pressure and a European Union proposal on how to deal with bank failures that has revived market fears of debt defaults in the euro zone this year.
The commission issued a consultation paper Thursday on a draft directive which would give regulators sweeping powers to restructure the debts of failing banks.
The rise in Portuguese yields doesn't bode well for next week's €750 million to €1.25 billion auction of the 3.60% October 2014 and 4.80% June 2020 bonds.
"Regardless of whether the fundamentals justify it or not, much of the bond market has been considering Portugal the next candidate for EFSF-ization," said analysts at Credit Agricole CIB, referring to a potential bailout via the €440 billion funding vehicle, the European Financial Stability Facility, set up after the Greek debt crisis for the euro-zone countries in need.
A rare coincidence of Spanish and Italian bond auctions Thursday, meanwhile, looks to provide a fertile ground for those betting against the euro zone's survival, Credit Agricole CIB said.
"The euroskeptic crowd should have a field day in the run-up to Thursday, with both Italy and Spain coming to the market in the 2015-2016 bucket," the bank's analysts say.
Spain will auction the 3.25% April 2016 bond, while Italy will sell the 3% November 2015 and 4.50% March 2026 BTPs, with both treasuries announcing the target volumes Monday.
"Recent bond issuance activities of the peripherals in 2010 triggered major pre-auction concessions, and it will be interesting to see how they will get out of the starting blocks in 2011," said David Schnautz, a strategist at Commerzbank AG in London.
Next week's debt supply of over €20 billion comes after around €19 billion of issuance from AAA-rated issuers Germany, France and the European Union this week. But while the market will watch more closely the weaker-rated countries next week, the top league won't remain idle either.
The Netherlands and Germany will each launch a new series of bonds, with up to €3.5 billion to be offered by the Dutch of the 1% January 2014 DSL Tuesday.
Germany will follow with the €6 billion auction of the February 2016 federal note, or bobl, Wednesday, with its coupon to be set Tuesday. Germany, however, will go for a double feature Wednesday, also selling €1 billion of the 1.75% April 2020-dated inflation-linked bund.
Slovakia will also kick off its 2011 funding, selling a new tranche of the 4% April 2020 bond Monday.
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Spain is among the 10 sovereign countries with the highest risk
On the other hand, the cost of insurance against default (CDS) of the Spanish debt to five years rose to 351,700 per year for every ten million issue
Spain is among the 10 sovereign countries with the highest risk
The British consultancy CMA has placed Spain in the list of the 10 countries of the world with greater risk of default on sovereign debt after posting the second-worst financial performance in the last quarter of 2010.
The data offered in addition to the rise in risk premium following the closing session, due to uncertainty about the ability of Portugal to avoid imminent rescue and public debt auctions next week will tackle several countries in the periphery of the euro including Spain.
CMA issued its Report on Credit Risk of Sovereign Debt, which places Spain in seventh place in Greece tops list, followed by the order of Venezuela, Ireland, Portugal, Argentina, Ukraine, Spain, Dubai, Hungary and Iraq.
Spain, enters this "top ten" for the first time, like Hungary, which according to the report relates to the debt generated by the housing bubble, which has increased by 50% the cost of protection against payment sovereign debt. "
However, the consultant noted that "China's support to the economy of Spain, both in terms of purchasing long-term debt and import volumes will help sustain one of the largest economies in the region."
Regarding the developments in debt between October and December last year, five European Union nations are like most have deteriorated in this period: Belgium, Spain, Germany, Netherlands and France lead in this order, This "negative list" , which in the view of CMA is evidence that "the European Union in 2010 ended one of the most difficult years for the region since the introduction of the euro in 1999. "
However, CMA also offers a list of the 10 most reliable in terms of debt, led by Norway, followed by Finland, Sweden, Switzerland, USA, Hong Kong, Denmark, Australia, Saudi Arabia and Germany, despite slightly worse in the last quarter- . Meanwhile, Argentina, Latvia, Abu Dhabi, Romania and the U.S. are the countries most improved in the fourth quarter of 2010.
The report comes at a difficult moment The report was unveiled at a conference in which she put into question the ability of Portugal to avoid a bailout, which shook the entire euro area.
In the case of Spain, the risk premium offered by Spanish bonds to ten years behind their German counterparts stood at its highest level since mid-December , to 269.6 basis points to log off.
The risk premium is the spread of what a country pays for its debt position with respect to the 'bund' German-the safest bonds and therefore reference. The increase in this figure reflects the danger that investors see a possible debt default by the issuing country.
For its part, the spread of the Portuguese debt to ten years for the 'bund' was shot up 438.9 points , while the 'spreads' of Irish bonds climbed to 636.5 points and the Greek debt reached 990.7 points. Also, the risk premium on bonds posted gains Italian to 189.5 basis points.
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Young people are fleeing Portugal in droves. But is this a bad thing?
In Portugal, having an optimistic start to 2011 hasn't been easy. Along with Greece and Ireland, Portugal is currently one of the three weakest economies in the eurozone: the press seems primed for our downfall. The minority socialist government led by José Sócrates says the budget deficit, thought to be 7.3% of GDP in 2010, needs to decrease to 4.6% this year.
Experts expect that Portugal will soon be forced to access the IMF financial stability fund, and Teixeira dos Santos, the finance minister, recently went on a "successful" visit to China in order to secure financial support. The country seems to be on sale. Organisations and enterprises are shrinking their budgets. Unemployment rates are at 10.9%. My friends in Lisbon tell me: "Don't come back. Things are so depressing over here."
Many choose to put their feet on the ground and move away to another country. The young are running fastest of all, and they are making experts in Portugal worry about a new emigration wave, which is seen as the biggest since the 1960s. More than two million Portuguese are estimated to be living abroad. Recent research by the economist Álvaro Santos Pereira says that around 6.5% of the 10 million population have left the country between 1998 and 2008 – a number that could be even higher in the next census in 2011. What is different from the previous wave of migration in the 1960s is that these new emigrants are most likely young, highly skilled, and choose new countries like Spain and the UK. A 2006 report by the World Bank warned that Portugal was suffering from serious brain drain, with 13% of graduates emigrating.
Conventional wisdom will tell us that these kind if emigration rates create at least two problems for a country: brain deficit, since there isn't a significant highly skilled immigration to fuel the workforce, and population shrinkage, because the birth rate is slowing down. Both facts can have a major long-term impact on social security funds.
And yet, it's worth asking if emigration on this scale is always necessarily a bad thing. Consider, for one, that one traditional reason behind Portugal's economic weaknesses has been our laissez-faire attitude to work. Statistics portray a youth that is averse to risk-taking, values comfort and longs for security. The Portuguese social structure is shaped by dependent children or married people.
A Dutch friend was telling me the other day that he left his parents' home at 18 – in Portugal, almost 60% of young adults between 18 and 34 still live at their parents, one of the EU's highest rates according to a 2008 Eurostat survey (in the UK it is about 40%). Telling a Portuguese son or a daughter to find his or her own apartment at 18 would be unthinkable, the equivalent of abandoning a child in the wild. There is no tradition of flatsharing; when middle-class twentysomethings get out of their parents' house, it's usually to get married.
The high number of young people leaving the country might indicate that something is changing in the Portuguese mindset. It might just herald the emergence of a more self-sufficient, curious, and less spoiled generation.
The European Union has had a major impact in those born in the 1980s, a generation who grew up during the economic growth of the 1990s and have paid their bills with the euro since 1999. Enrolling in international scholar programmes such as Erasmus has become common; plus, foreign students come and go to Portuguese universities, and international networks expand. Travelling is much more regular for them than it was for me – my first flight was at 18, which makes my nephews laugh. The world, and especially Europe to where this new emigration wave is heading, has become a less frightening place. Might this generation have the competitive edge that has previously been lacking in the country?
The question remains whether these highly skilled workers would want to go back to Portugal once they've found success abroad. The scientist António Damásio or the artist Paula Rego are only two of many successful Portuguese emigrants who have decided to settle abroad permanently. A side effect of our Roman Catholic heritage is that we aren't very good at praising people for their successes and rewarding merit. Portuguese elites are suspicious and small; they are distant from the rest of the population, which in turn does not trust them either – as shown in research conducted by the sociologist Manuel Villaverde Cabral in 2004. We have problems with words like meritocracy and competitiveness, seen as part of a vocabulary used by capitalists or by over-achievers.
How would those who went abroad and increased their cultural capital fit in a milieu that ejects outliers when it is supposed to appreciate them?
That's the conundrum.
The question of how to convert the value of an individual's journey into a public benefit has yet to be solved in Portugal.
Portugal
Portuguese Bonds Lead Euro-Area Declines as 2011 Supply Looms
Jan. 8 (Bloomberg) -- Portuguese government bonds fell, pushing the 10-year yield up by the most in eight months, amid concern demand at auctions next week may falter.
Spanish 10-year bonds also posted a weekly decline, driving the extra yield investors demand to hold the securities instead of similar-maturity German bunds to the highest in more than a month. After Greece and Ireland, which sought European Union bailouts, bonds from Portugal, Spain and Italy had the biggest losses last year among 26 markets tracked by Bloomberg and the European Federation of Financial Analysts Societies.
“We’re carrying on from where we left off,” said Steven Mansell, director of interest-rate strategy at Citigroup Global Markets Ltd. in London. “The fact we’re going into the first auctions of the year with all the peripheral markets under pressure doesn’t augur well. Portugal will probably be forced to follow the same path as Ireland before long.”
The yield on Portuguese 10-year bonds rose 64 basis points from Dec. 30 to 7.39 percent as of 5:04 p.m. in London yesterday. The price of the 4.8 percent security maturing in June 2020 fell 3.875, or 38.75 euros per 1,000-euro ($1,300) face amount, to 82.835. The extra yield investors demand to hold the bonds instead of benchmark German bunds widened to the most since Dec. 1.
Portugal and its peers are trying to convince investors they can narrow their budget gaps after Europe’s debt crisis led to a surge in bond yields. Its borrowing costs jumped at a six- month bill sale on Jan. 5. The nation plans to auction bonds maturing in 2014 and 2020 on Jan. 12, with Spanish and Italian sales planned for Jan. 13.
Government Irresponsibility
“Borrowing at these levels is just going to accumulate their debt burden, it’s going to make the situation worse,” Mansell said about Portugal.
European Central Bank President Jean-Claude Trichet said yesterday that central-bank measures can’t be relied on to make up for government irresponsibility, calling for more fiscal reform. Economists estimate unanimously that policy makers will leave the benchmark interest rate at 1 percent in a decision due to be announced on Jan. 13.
Spanish 10-year yields climbed six basis points to 5.57 percent and Irish yields rose one basis point, to 9.28 percent.
Italian 10-year bonds fell in the three days through yesterday, paring a weekly advance and leaving the yield two basis points lower at 4.83 percent.
German bund yields fell to 2.88 percent from 2.95 percent on Dec. 30.
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Portugal's debt worries worsen as bond yield rises
The yield on Portuguese 10-year bonds has risen to a euro-era record of 7.1 percent amid market fears about the debt-laden country's economic health.
Investors are worried that Portugal won't be able to meet its debt obligations and may need a bailout like Greece and Ireland, deepening the eurozone's debt crisis.
The Portuguese government insists it doesn't need financial help and says its debt reduction plan is on track.
But markets are skeptical and on Friday demanded an even higher premium to risk their money on the eurozone's more indebted countries.
Portugal aims to raise euro1.25 billion in a bond auction next week in a key test of investor confidence.
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Window licking nuts and....
.....Ninja nuts
Ninja Nuts
A true story by Mr.Poo, played by real nuts.
Mr.Poo
The problem with the Eurobond is that the German do not want to have to pay the increase interest cost....
In the United States the Federal Government can shift money to the various States...this is not allowed in the Euro countries.
So far it's been a Turkey shoot for the Hedge funds picking off the weaker Euro countries.
First Greece....then Ireland....and now Portugal and Spain are the next two countries on the hit list.
If if not resolved quickly this will pull the rest of the World back into Recession.
I would agree, I do not have time to be watching over my shoulder for BIG Brother.
BIG Brother is too busy trying to get people to spend money, creating jobs, and creating debt that the taxpayers can never repay.
Beijing, Tendering Financial Support to Europe, Also Helps Itself
Chinese officials have stepped up their vows of support for European economies in the last several weeks, pledging to help Europe contain a sovereign debt crisis and accelerate a recovery.
This week, Beijing renewed a promise to buy debt from Spain and other countries feared to be facing a bailout.
China’s increasingly vocal backing appears aimed at curbing losses on its growing financial investments in Europe, as well as helping to thwart a deeper downturn in an economic bloc that has overtaken the United States as China’s largest trading partner.
Although surging growth has helped transform China into an economic powerhouse, a worsening of Europe’s crisis would be bad for business because the European Union buys a quarter of all goods made in China.
“If you’re an export-driven economy like China, and the E.U. and the euro zone are your key export markets, it’s in your interest to stabilize the financial and economic situation,” said Ken Wattret, chief euro zone economist at BNP Paribas in London.
This week, a delegation led by China’s executive deputy prime minister, Li Keqiang, is reinforcing that message in a series of visits to European capitals.
Prime Minister José Luis Rodríguez Zapatero of Spain, Chancellor Angela Merkel of Germany and Prime Minister David Cameron of Britain are rolling out the red carpet at each stop.
Mr. Li, who is expected to become China’s next prime minister, is pledging to buy bonds worth billions of euros and to commit billions more in business deals.
In newspaper opinion pieces published in all three countries this week, Chinese officials emphasized Beijing’s support for European leaders as they seek to exit the crisis.
Having failed so far to dig Europe out of a hole or quell fears that the crisis will spread, European officials are welcoming Mr. Li’s spending spree.
This week, the Pacific Investment Management Company, the largest bond fund in the world, said it had stopped buying the government bonds of Portugal, Greece and Ireland, where bond yields have risen, reflecting concerns of a possible default.
In an interview with the German newspaper Süddeutsche Zeitung, Andrew Bosomworth, Pimco’s manager in Munich, said the fund was also not investing new money in countries that were solvent but considered risky, including Spain and Italy.
China, on the other hand, is looking to diversify some of its $2.7 trillion in foreign currency reserves away from United States Treasury debt and its low yields, and into other investments, including euro-denominated debt.
And China could profit handsomely if its pledges of support helped countries like Greece and Portugal avoid a restructuring.
On Wednesday, the Spanish news media reported that Mr. Li said China would buy 6 billion euro ($7.8 billion) worth of bonds from Spain.
Support for Europe could have another beneficial effect for Beijing. Although China is not saying how much debt it is buying, analysts said the mere pledge to buy debt made it difficult for investors to bet against the euro, helping to bolster the currency.
A sharply weaker euro, which has already slid nearly 10 percent against the dollar in the last year, would make high-quality goods produced in countries like Germany more affordable on world markets, providing a greater challenge to Chinese exports.
Continued purchases of troubled European debt could carry risks further out for China, especially since Europe has decided to force some sovereign debtholders to take losses for defaults on investments made after 2013.
If part of the Chinese strategy is to “ensure that they get repaid when others don’t, they’re kidding themselves,” said Kenneth S. Rogoff, an economics professor at Harvard and a former chief economist at the International Monetary Fund.
A further benefit redounds for China in its European strategy, analysts say. This week, Mr. Li presided over more than a dozen business deals with Spanish companies, including one between China Petrochemical and Repsol, Spain’s largest oil company, to expand oil exploration in Latin America.
Both Spain and Portugal have significant strategic holdings in Latin America and Africa, two parts of the world where China wants to continue expanding.
“Spain and Portugal are not as much a beachhead for China into Europe — how strategically important are they, really?” said Marko Papic, a senior Europe analyst at Stratfor, a geopolitical intelligence company in Austin, Tex. “But they do have these cultural, colonial and historic links to two regions that China is interested in.”
Mr. Li arrived in Berlin on Thursday for talks with the economy minister, Rainer Brüderle. On Friday, he is scheduled to meet with Mrs. Merkel; the German president, Christian Wulff; and the foreign minister, Guido Westerwelle.
German exports to China amounted to 36.5 billion euros in 2009, and imports totaled 55.5 billion euros. Germany is China’s biggest trading partner by far in Europe, and trade is surging, especially for high-value electrical and electronic goods. Germany’s car industry, which suffered during the downturn, has recovered thanks to an increase in Chinese demand.
But German companies want Mrs. Merkel to lobby for the ability to invest more in China. So far, Beijing has been noncommittal to such requests.
Instead, China intends to use this visit to ask Germany to open its doors further for Chinese investment.
Mr. Li’s visit is also seen as crucial in Britain, two months after Mr. Cameron helped win significant industrial orders during a trip to Beijing with ministers and business executives.
Mr. Cameron has pledged to strengthen economic ties with faster-growing economies, and hopes to build on his success in Beijing as a counter to a strict austerity program that is stifling the British economy.
China has made it clear, though, that its dealings with Britain are a part of its broader relations with the European Union.
“China alone may not be able to solve the problem for Europe,” Liu Xiaoming, China’s ambassador to Britain, wrote in The Telegraph on Tuesday, “but it is willing to help as a true friend and partner when Europe is in need.”
China to rescue
The Euro is dead
Europe is living in denial. Even after the economic crisis exposed the eurozone's troubled future, its leaders are struggling to sustain the status quo. At this point, several European countries will likely be forced to abandon the euro within the next year or two.
European leaders tell us that this is impossible. There is no legal mechanism, they say, for exiting the euro. But the collapse of the euro is simple arithmetic: Once a country's debt-to-GDP ratio gets high enough, it becomes impossible for it to generate enough future taxes to repay its existing debt and interest costs. This week, Portugal became the latest country to threaten the integrity of the eurozone when it saw the yield on its Treasury bills soar, based on investors' fears that it would be unable to pay its debt.
The only way out of this conundrum is for countries with insurmountable debt burdens to default on their euro-denominated debts and exit the eurozone so that they can finance their continuing fiscal deficits by printing their own currency. Here's a hint for Europe's politicians: If the math says one thing and the law says something different, it will be the law that ends up changing.
The countries currently teetering on the precipice include "peripheral" countries -- such as Greece, Ireland, and Portugal -- as well as large countries, such as Spain, Italy, and France. It is extremely unlikely that all of these countries will still be members of the eurozone by the time revelers gather to ring in New Year's 2013. The most likely scenario is that the next two years will witness the departure of more than one peripheral country and at least one of the large countries.
Greece is at the top of that list. The country will soon have a sovereign debt-to GDP ratio of more than 150 percent and an economy that contracted approximately 4 percent in the past year. It has long suffered from the worst corruption and largest shadow economy in Europe, while also possessing some of the lowest labor participation rates, most generous pension systems, and highest consumption rates among its European peers. It is true that the Greeks have made heroic efforts in the past six months to cut spending and raise taxes, but it won't be enough to reverse the explosive costs of covering its debts. And yet, the story goes, Greece will somehow repay what it owes.
Following closely on Greece's heels is Ireland. During the so-called "Irish miracle," the country experienced a housing boom that saw twice the appreciation as did the United States. When this bubble popped, Ireland's banking system suffered a massive loss. The government's bank bailouts have added more than 20 percent of GDP to its budget deficit in the past year and will add a similar additional amount to its deficits in the near future.
The Irish case also shows the perils of EU intervention. Ireland was forced by its self-serving European partners to guarantee massive bank debts -- in order to forestall debilitating losses to German, Belgian, Danish, and British banks, among others -- as a condition for receiving emergency EU assistance. This Irish policy mistake has raised its debt to stratospheric levels, which the government will be hard-pressed to bring down. Thus, in effect, some of the largest EU countries proved their willingness to throw Ireland under the bus to postpone dealing with their own financial institutions' problems.
Now Spain is being pushed by those same European partners into making the same deadly mistake as Ireland. Spain's housing boom was similar to that of Ireland and was similarly financed by large external borrowings. The good news in Spain, however, is that most of the country's largest financial institutions appear to be solvent. If Spain shuts down its insolvent savings banks and allows closed banks to default on their external bond debts held by other EU countries' banks, Spanish sovereign solvency can be preserved.
A number of other European countries face similarly daunting fiscal challenges. Italy, for example, is running a debt-to-GDP ratio in excess of 125 percent. Although serious and immediate fiscal spending cuts could give Italy a reasonable chance of repaying its debts, the country seems so politically broken that it is unlikely to make the deep spending cuts that would permit it to stay in the euro. Its meager cuts this past year are an indication of how difficult it is for Italy's political system to confront its challenges.
The same failure of political will bedevils France, Belgium, and Portugal. The French proved that they are willing to riot over a two-year extension of the retirement age. They will need to reconcile themselves to far more drastic measures if they hope to get their dismal fiscal situation under control.
This partial collapse of the euro is inevitable, and Europe's leaders should focus on the next step: Their challenge now is to lay the groundwork for a sustainable currency union in the future, once exiting countries reform themselves enough to rejoin. To do so, however, they will need to take stock of the institutional deficiencies undermining the current union, so that the new eurozone is more crash-proof than the last one.
Europe must do far more to cut the growth of government spending -- the only credible path to preventing ballooning deficits. But it needs to go even a step beyond that: Europe must agree on measures that prevent countries from behaving irresponsibly to take advantage of their membership in the eurozone. One of the reasons that Italy and Greece spent so much is that their interest rates on debt fell dramatically when they joined the eurozone, making deficit finance more attractive. There is no substitute for the creation of a fiscal union, which would centralize enforcement power that could credibly control spending. A currency union cannot survive without a corresponding fiscal union.
But fiscal reform is not enough without measures to strengthen the competitiveness of southern Europe. Southern European countries, notably Spain, Italy, Portugal, and Greece, are finding it increasingly difficult to compete in global trade -- the result of restrictive union contracts and labor laws -- and have accordingly suffered from high current account deficits and high unemployment. If left unchecked, these dynamics will produce a political powder keg of widening interregional economic-welfare differences that would threaten the long-term cohesion of the union.
The only way around this problem is to make southern Europe more business-friendly. That means making it easier for businesses to fire workers and cut wages. It also means less generous welfare programs and credible efforts to reduce corruption and lower entry barriers to foreign competition. A reconstructed eurozone should make the implementation of these reforms part of the requirement for membership.
The European financial sector is also in dire need of reform. New regulations should be put in place that make banking collapse less likely, most importantly through the creation of credible means of measuring bank risks and requiring capital and liquidity commensurate with those risks. Europe should also put in place policies that transparently and predictably allocate authority across different national regulators in the event of a bank's collapse. Without a credible plan for resolving a large global bank crisis, politicians will tend to prefer bailouts as a means of avoiding unpredictable financial chaos.
Policymakers must learn that the "too-big-to-fail" problem is both dangerous and avoidable, and that choosing not to bail out banks is a viable option. Politicians today are frightened of transparency in the recognition of bank losses and are often unwilling to close insolvent banks out of a fear of "systemic risk." However, it is only by credibly recognizing banking-system losses that governments can put an end to uncertainties in the financial market.
The eurozone's problems are not going away. Whether these problems will eventually be seen as bumps on the road to a credible currency union or as symptoms of the irreconcilable conflicts within Europe depends on how the eurozone countries react. The good news is that Europe possesses the techniques of statecraft and financial engineering to build the institutional foundations of a long-lived, stable union. The lingering question, however, is whether it possesses the political will to do so.
Euro is dead
Denmark’s Biggest Pension Fund Says Won’t Touch Peripheral Debt
Jan. 5 (Bloomberg) -- Denmark’s biggest pension fund, ATP, said it won’t touch government bonds issued by the European Union’s most indebted nations as it deems the risk too great.
“We invest in government bonds in order to purchase interest-rate risk, whereby we try to avoid credit risk entirely,” said Lars Rohde, chief executive officer at ATP, which is based north of Copenhagen, in an e-mailed reply to questions today. “This means that we for a long time have completely avoided government debt issued by Greece, Ireland and so forth; our European government bond holdings only include Danish, German and, to a lesser degree, French bonds.”
Though the single currency shared by 17 European Union nations is likely to survive, a few of the region’s members will probably have to restructure their debts, according to Harvard University Professor Kenneth Rogoff. Euro-region leaders last month agreed to amend the bloc’s treaties to put in place a permanent crisis mechanism in 2013 to contain future debt shocks. That mechanism won’t address existing budget stresses faced by countries including Portugal and Spain.
“When we invest in government bonds, it’s absolutely critical for us that there can be no doubt that we’ll get our money back,” Rohde said.
ATP, which at the end of the third quarter had a total investment portfolio of 397.2 billion kroner ($70.3 billion), delivered a return on total assets of 5.7 percent in the first nine months, it said in its quarterly report on Oct. 28.
Rescue Packages
Greece, which received a 110 billion-euro ($146 billion) loan from the European Union and International Monetary Fund in May after it struggled to repay its debts, will this year post a 7.4 percent budget deficit of gross domestic product, compared with a 9.6 percent shortfall in 2010 and a 15.4 percent gap the previous year, the European Commission said on Nov. 29.
Ireland, which received an 85 billion-euro rescue package last quarter, will this year post the widest deficit in the EU at 10.3 percent of GDP, following 2010’s 32.3 percent, according to the commission.
The euro lost 0.7 percent against the dollar to trade at 1.3219 at 1:03 p.m. in London. The currency has declined 7 percent since a Nov. 4 high.
The additional yield investors demand to hold 10-year Greek government bonds instead of benchmark German bunds widened to a record today. The difference in yield, or spread, reached 974 basis points as of 10:54 a.m. in London, the most on record, according to data compiled by Bloomberg.
Shorts are being squeezed
Soros Mistrusts EU Aid as Irish Default Risk Soars: Euro Credit
Jan. 6 (Bloomberg) -- Ireland’s bailout money starts to arrive next week, with investors expressing skepticism about the country’s ability to repay its debts by driving the cost of insuring against default to a record.
The government was forced in November to accept 85 billion euros ($113 billion) to bolster its finances and inject 10 billion euros into Irish banks, with another 25 billion euros in reserve. Assessing the aid plan, billionaire George Soros wrote in the Financial Times last month that the country will have to renegotiate the accord. Finance Minister Brian Lenihan said a default would “destroy” the country.
“If the government doesn’t have to put more than the 10 billion-euro initial capital injection into the banks, the package is doable,” said Brian Devine, an economist at NCB Stockbrokers in Dublin. “But there’s a higher probability a government would have to renegotiate on sovereign debt if the bank costs move beyond that.”
Irish bonds have rallied since the country secured the bailout on Nov. 28 and as the European Central Bank bought the country’s securities. The extra yield investors demand to hold Irish 10-year bonds rather than the German benchmark has narrowed to 613 basis points from a euro-era record of 680 reached on Nov. 30. That’s still 10 times the decade’s average.
The cost of protecting Irish debt against non-payment for five years with credit-default swaps has more than doubled to a record 628 basis points in the past six months, according to CMA prices in London. That implies a more than 40 percent chance that the nation won’t repay investors on time, CMA said.
Anticipating Default
“The market seems to be pricing in the possibility that Ireland may have to restructure its debt,” said Michiel de Bruin, who oversees about $35 billion as head of European government debt at F&C Netherlands in Amsterdam. “It’s something that cannot be excluded.”
Ireland agreed on the aid package with the European Union and the International Monetary Fund after borrowing costs soared because of increasing concern the cost of rescuing lenders, including Anglo Irish Bank Corp., would overwhelm the state. That followed Greece’s rescue in May as sovereign debt concerns wiped 6.5 percent off the euro’s value against the dollar in 2010.
“We’re in a cul-de-sac,” said David McWilliams, a former central bank economist and the author of three books on the Irish economy. “You want to avoid defaulting on sovereign debt, so we need to cut the link with bank debt.”
Bailout Terms
Part of the bailout includes money to recapitalize the country’s banks, which the government agreed to reduce in size. Ireland can also tap into 50 billion euros to cover day-to-day spending for the next three years. In return, Prime Minister Brian Cowen’s government agreed to reduce spending, raise taxes and cut the minimum wage. As part of the bailout accord, the government pledged to protect holders of senior bank bonds.
The next administration might not stick to the arrangement, according to Soros, the 80-year-old investor who became renowned in the early 1990s after betting against the pound. National elections in Ireland will probably take place in March, with the ruling Fianna Fail party trailing the opposition Fine Gael by 17 percentage points in the latest opinion poll.
‘Politically Unacceptable’
That next government “is bound to repudiate the current arrangements,” Soros said in his Dec. 14 article for the FT. Soros called the protection of senior bank bondholders “politically unacceptable’,’ and said interest rates charged on rescue packages should be lowered to avert the risk “that the euro may destroy the political and social cohesion of the EU.” Ireland will pay an average 5.8 percent interest rate on the aid.
Michael Vachon, a New York-based spokesman for Soros, said by telephone on Jan. 4 that the billionaire investor wouldn’t comment for this story.
Ireland’s debt will peak at 125 percent of gross domestic product in 2013, rising from 25 percent in 2007, the International Monetary Fund said on Dec. 17. The average for the euro region in 2011 will be 87 percent, the European Commission forecast on Nov. 29.
Even without the bailout, Ireland’s debt interest payments were expected to consume 20 percent of tax revenue in 2014, rising from 8 percent in 2009, the government said on Nov. 24.
“There are significant risks to the program that could affect Ireland’s capacity to repay the Fund,” the Washington- based IMF, which is channeling 22.5 billion euros to Ireland as part of the bailout, said in its report last month.
Greek Extension
Greece unofficially informed EU officials and the European Central Bank that after 2013 it will seek an extension on all outstanding debt and a reduction in interest, Ta Nea newspaper reported last month, without citing anyone. Finance Minister George Papaconstantinou told the Reuters news agency on Jan. 4 that Greece isn’t in talks with creditors on restructuring its debt. The yield gap between Greek and German 10-year bonds widened to a record 974 basis points yesterday.
The Irish government has said it will honor its debts, including bank borrowing. Lenihan said defaulting on senior bank debt isn’t an option, after the state seized Allied Irish Banks Plc, the country’s second-biggest lender, on Dec. 23 as bad debts surged.
“We have to stop having silly arguments about default all the time,” said Lenihan in an interview with Dublin-based broadcaster RTE on Dec. 23. “It will destroy this country if we start defaulting on senior banking obligations.”
Soro Squeeze
Greece will weather the debt crisis
ANA-MPA -- Finance Minister George Papaconstantinou categorically rejected speculation over a debt restructuring with creditors, and said Greece would weather out the debt crisis, helped by privatization of state assets worth seven billion euros.
In an interview with Reuters news agency released Tuesday, the Greek FinMin said the country has cut its debt and has met all obligations towards the IMF and the European Union in return for a 110-billion-euros bailout, and noted that the government was also promoting structural reforms. (ANA-MPA)
He also denied reports that Greece was in talks with debt holders for extending the repayment period of the country’s existing debt. (ANA-MPA)
"There are no such talks," Papaconstantinou said, dismissing reports that Greece was in talks with creditor banks. "This would not help Greece, the Greek economy, Greek banks, Greek citizens or the European problem," he noted. (ANA-MPA)
He stressed that Greece was making steady progress on cutting its fiscal deficit and was promoting unpopular reforms to ensure payment of the fourth tranche of a troika loan, worth 15 billion euros in March. (ANA-MPA)
"We finished 2010 on target, with reforms meeting the time schedule," Papaconstantinou said, adding that there was no reason to doubt for the next tranche, or any other tranche of the loan, "as long as we do our job correctly". (ANA-MPA)
He said privatisation proceeds were expected to total 1.0 billion euros this year, with an additional six billion euros expected in 2012-2013, including airports, public sector enterprises, real estate property and gaming. “We will use a very flexible methodology. We have a revenue target but was more important was to have the expertise and the dynamism that private investments would bring to these sectors. He reiterated that Greece would seek a return to capital markets this year, depending on market conditions, along with the issuance of a Diaspora bond loan to Greeks living abroad. (ANA-MPA)
Papaconstantinou said talks with China over the purchase of Greek state bonds were progressing, but declined to say anything more specific over the amount or the time of the deal. He noted that Greece would like an extension of repaying its IMF/EU loans to cover not only outstanding tranches but those already paid. The European Commission was positive over this request but we have to wait for Eurogroup’s final decisions, Papaconstantinou said. (ANA-MPA)
Additionally, he sounded optimistic that the European Union would reach an agreement over joint issuance of euro bonds. (ANA-MPA)
weather the storm
China helps take pressure off euro
Spain, Portugal and Greece -- three of the eurozone's most financially shaky members -- in recent months have touted a lifeline thrown to them by China: a promise to buy these countries' embattled bonds.
The pledges from the government in Beijing temporarily took some pressure off European debt markets, but China has been quiet on how much money it will actually invest. What is clear is that China has an immense interest in helping the eurozone, its biggest trading partner, out of its current woes.
On Wednesday, Spain signed more than a dozen business accords with China, two days after Vice Premier Li Keqiang wrote in daily El Pais that his country will keep on buying Spain's public debt as a show of support.
That follows similar deals and promises from China for already bailed-out Greece and Portugal, seen by many as the next weakest link in the 17-country eurozone.
Europe has been fighting a bruising battle to keep its currency union together. But a euro110 billion rescue loan for Greece and the euro67.5 billion bailout of Ireland have failed to erase fears that mounting debts in several member states might be too much for the struggling eurozone and could eventually even endanger the euro.
A deepening crisis in Europe or a meltdown of the euro -- which already appeared to be in a state of free-fall last spring -- would hurt China, now the world's second largest economy and holder of massive foreign currency reserves, most of it in U.S. dollars.
Beijing believes that a stable global economy needs at least two lead currencies, and China has already invested heavily in European government bonds to prop up the euro as a viable alternative to the dollar, says Vanessa Rossi, a senior research fellow at Chatham House in London.
Much of China's clout come from its large trade surplus and the savings that result from it, a sharp contrast to the debt woes of some of Europe's governments. Rossi estimates that of China's massive $2.5 trillion foreign exchange reserves, close to $1 trillion are holdings in Europe. That's still far behind the $1.5 trillion invested in the United States, but would imply that China on average now holds about 10 percent of eurozone government debt, says Rossi.
Any new promises to buy bonds come on top of significant existing investments, and are mostly meant as a "psychological support" for the euro, says Rossi.
Yet psychological support is significant, as more confidence in government bonds means lower interest costs when indebted countries borrow and could help prevent a death spiral in which rising borrowing costs feed default fears and end with the country unable to borrow -- and needing a bailout.
Beijing's interest goes beyond the stability of the euro. A deep or prolonged economic depression in Europe -- a possible consequence of a breakup of the eurozone -- would hurt China, which sells about 25 percent of its exports to the continent.
Greece, Portugal, and Spain are relatively small in terms of trade. But their collapse could hit Germany, which gobbled up some euro29 billion in Chinese exports in the first 6 months of 2010, while supplying the Peoples Republic's elite with luxury cars, industrial investment and technologically advanced goods.
China's recent deals with Europe's weaker members also include investments in key sectors such as ports and telecommunications -- investments that other countries have been reluctant to allow.
Indirectly tying support on debt markets to other business accords presents China with "a dream opportunity to hammer out some lucrative business deals," says Jonathan Holslag, a research fellow at the Institute for Contemporary China Studies at the University of Brussels.
Once a country has advertised Beijing's help with its bonds, it becomes much harder to say no to other investments, says Jean Pisani-Ferry, the director of Brussels-based think tank Bruegel.
Some analysts are worried that financial help might come at a political cost.
"For a lot of smaller member states we have already seen that there was growing pragmatism relating to China," says Holslag.
Portugal and Spain have supported China's demand to be granted market economy status, while Greece, Italy and others have been pushing the EU to drop its arms embargo, which was imposed after the 1989 massacre on Tiananmen Square.
When the EU's High Representative for Foreign Affairs Catherine Ashton prepared a report on the bloc's relations with China, "the member states that had a lot of financial problems took a very kind position on all issues," says Holslag. "It was really the first indication that the growing economic dependency on China is having some impact."
It's not that China is necessarily asserting direct pressure on these governments. "It's more subtle than that," says Holslag. "The deeper the economic cooperation with European member states, the more favorable will China's position be viewed."
Others are not convinced that China is really putting its money where its mouth is and that it's real interest is not in helping out the various Europeans in their battles with the bond vigilantes, but in staving off relentless political pressure from the U.S.
Lutz Karpowitz, a senior foreign exchange strategist at Commerzbank in Frankfurt, says China knows it has to allow its artificially depressed currency -- the yuan -- to rise against the dollar to get lawmakers in the White House and Congress off its back, but would much rather do it in the context of a falling dollar.
If other currencies such as the euro rise, China needn't lose out as the yuan's value would stay more or less the same on a trade-weighted basis.
"This is all a lot of political talk," says Karpowitz. "They don't care about Portugal or Greece and I'm not sure they're particularly interested with the Spanish reforms."
China has increasingly become an easy target for U.S. politicians as the country's unemployment remains stubbornly high. While the U.S. continues to run up a massive trade deficit, China is reaping massive surpluses as its industrial might gets stronger by the day.
Under a free-floating environment, economists say the yuan would rise in value against the dollar in these circumstances. The problem, at least as seen in the U.S., is that it hasn't because the Chinese authorities want to keep their currency depressed to continue its export-led growth.
Chinese Takeout