Saturday 6th February 2016
NEWS TICKER: Friday, February 5th: According to Reuters, Venezuela's central bank has begun negotiations with Deutsche Bank AG to carry out gold swaps to improve the liquidity of its foreign reserves as it faces debt payments of some $9.5bn this year. Around 64% of Venezuela's $15.4bn reserves are held in gold bars, which in this fluid market impedes the central bank's ability to mobilise hard currency for imports or debt service. We called the central bank to confirm the story, but press spokesmen would not comment - The Hong Kong Monetary Authority (HKMA) says official foreign currency reserves stood at $357bn (equivalent to seven times the currency in circulation or 48% of Hong Kong M3) as at the end of January, down compared with reserve assets of $358.8bn in December. There were no unsettled foreign exchange contracts at month end (end-December: $0.1bn) - BNP Paribas today set out plans to cut investment banking costs by 12% by 2019 to bolster profitability and reassure investors about the quality of its capital buffers. The bank is the latest in a line of leading financial institutions, including Credit Suisse, Barclays and Deutsche Bank which look to be moving away from capital intensive activities. BNP Paribas has been selling non-core assets and cutting back on operations including oil and gas financing for the last few years as it looks to achieve a target of 10% return on equity. Last year the bank announced a €900m write-down on its BNL unit in Italy, which pushed down Q4 net income down 51.7% to €665m - Johannesburg Stock Exchange (JSE)-listed tech company, Huge Group, will move its listing from the Alternative Exchange (AltX) to the JSE main board on March 1st - Moody's says it has assigned Aaa backed senior unsecured local-currency ratings to a drawdown under export credit provider Oesterreichische Kontrollbank's (OKB) (P)Aaa-rated backed senior unsecured MTN program. The outlook is negative in line with the negative outlook assigned to the Aaa ratings of the Republic of Austria, which guarantees OKB’s liabilities under the Austrian Export Financing Guarantees Act – As the first phase of talks between Greece and its creditors draws to an end, International Monetary Fund chief Christine Lagarde stressed to journalists in Greece that debt relief is as important as the reforms that creditors are demanding, notably of the pension system. "I have always said that the Greek program has to walk on two legs: one is significant reforms and one is debt relief. If the pension [system] cannot be as significantly and substantially reformed as needed, we could need more debt relief on the other side." Greece's pension system must become sustainable irrespective of any debt relief that creditors may decide to provide, Lagarde said, adding that 10% of gross domestic product into financing the pension system, compared to an average of 2.5% in the EU, is not sustainable. She called for "short-term measures that will make it sustainable in the long term,” but did not outline what those measures might be. According to Eurobank in Athens, IMF mission heads reportedly met this morning with the Minister of Labour, Social Insurance and Social Solidarity, Georgios Katrougalos, before the team is scheduled to leave Athens today. According to the local press, it appears that differences exist between the Greek government and official creditors on the planned overhaul of the social security pension system. Provided that things go as planned, the heads are reportedly expected to return by mid-February with a view to completing the review by month end, or at worst early March. In its Winter 2016 Economic Forecast published yesterday, the European Commission revised higher Greece’s GDP growth forecast for 2015 and 2016 to 0.0% and -0.7%, respectively, from -1.4% and 1.-3% previously - Fitch says that The Bank of Italy's (BoI) recent designation of three banks as 'other systemically important institutions' (O-SIIs) has no impact on its ratings of the relevant mortgage covered bond (Obbligazioni Bancarie Garantite or OBG) programmes. Last month, BoI identified UniCredit, Intesa Sanpaolo. and Banca Monte dei Paschi di Siena as Italian O-SIIs. Banco Popolare and Mediobanca have not been designated O-SIIs. This status is the equivalent of domestic systemically important bank status under EU legislation. Fitch rates two OBG programmes issued by UC and one issued by BMPS, which incorporates a one-notch Issuer Default Rating (IDR) uplift above the banks' IDRs. The uplift can be assigned if covered bonds are exempt from bail-in, as is the case with OBG programmes under Italy's resolution regime and in this instance takes account of the issuers' importance in the Italian banking sector – Meantime, according to local press reports, Italian hotel group Bauer and special opportunity fund Blue Skye Investment Group report they have completed the rescheduling and refinancing of Bauer’s €110m debt through the issue of new bonds and the sale of non-core assets, such as the farming business Aziende Agricole Bennati, whose sale has already been agreed, the Palladio Hotel & Spa and a luxury residence Villa F in Venice’s Giudecca island – Meantime, Russian coal and steel producer Mechel has also agreed a restructuring of its debt with credits after two intense years of talks. The mining company, is controlled by businessman Igor Zyuzin - Asian markets had a mixed day, coming under pressure. Dollar strengthening worries investors in Asia; from today’s trading it looks like dollar weakening does as well. Actually, that’s not the issue, the dollar has appreciated steadily over the last year as buyers anticipated Fed tightening; but it has hurt US exports and that has contributed to investor nervousness over the past few weeks, which is why everyone is hanging on today’s The nonfarm payrolls report, a bellwether of change – good or bad in the American economic outlook. Back to Asia. The Nikkei 225 ended the day at 16819.15, down 225.40 points, or 1.32%; and as the stock market fell the yen continued to strengthen. The Nikkei has shed 5.85% this week. The dollar-yen pair fell to the 116-handle, at 116.82 in afternoon trade; earlier this week, the pair was trading above 120. It is a hard lesson for the central bank, whose efforts to take the heat out of the yen by introducing negative interest rates has done nothing of the sort. Australia's ASX 200 closed down 4.15 points, or 0.08% after something of a mixed week. The index closed at 4976.20, with the financial sector taking most of the heat today, with the sector down 0.7%. In contrast, energy and materials sectors finished in positive territory, buoyed by gains in commodities. The Hang Seng Index closed at 19288.17, up 105.08 points (or 0.55%) while the Shanghai Composite was down 0.61%. down 17.07 points to 2763.95. The Shenzhen composite dropped 20.36 points (1.15%) to 1750.70, while the Kospi rose marginally by 0.08% to 1917.79. Today is the last day of trading on the Chinese exchanges for a week.

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The European Review

By Patrick Artus, chief economist at Natixis

Are there available instruments to stimulate euro zone growth, and are they likely to be used?

Friday, 15 June 2012 Written by 
Are there available instruments to stimulate euro zone growth, and are they likely to be used? A consensus is emerging that euro zone growth must be boosted to prevent several countries from slipping into a depressive cycle where production declines and unemployment increases without the fiscal deficit or the external debt correcting. We have drawn up a list of available instruments to boost euro zone growth (wage increases, fiscal deficits, European investments, a range of actions by the ECB, weakening of the euro) and seek to determine which measures are most likely to be implemented. The risk is that agreement between European countries is only reached on policies that do not provide a substantial boost to growth in the euro zone – faster (spontaneous) wage increases in Germany, increase in investments by the EIB and structural funds, a third VLTRO, a cut in the euro repo rate – and not on policies that would have a much greater impact, such as fiscal stimulus in Germany, purchases of government bonds by the ECB, massive currency purchases (dollars) by the ECB. http://www.ftseglobalmarkets.com/

A consensus is emerging that euro zone growth must be boosted to prevent several countries from slipping into a depressive cycle where production declines and unemployment increases without the fiscal deficit or the external debt correcting.

We have drawn up a list of available instruments to boost euro zone growth (wage increases, fiscal deficits, European investments, a range of actions by the ECB, weakening of the euro) and seek to determine which measures are most likely to be implemented.

The risk is that agreement between European countries is only reached on policies that do not provide a substantial boost to growth in the euro zone – faster (spontaneous) wage increases in Germany, increase in investments by the EIB and structural funds, a third VLTRO, a cut in the euro repo rate – and not on policies that would have a much greater impact, such as fiscal stimulus in Germany, purchases of government bonds by the ECB, massive currency purchases (dollars) by the ECB.

There is a consensus over growth stimulus in the euro zone

There is a growing consensus that growth in the euro zone needs to be boosted. The recession is leading to a situation in an increasing number of countries where the fiscal deficit is no longer being reduced (Spain, Italy, Portugal, and Greece).



Meanwhile, despite the slowdown in domestic demand, the external deficit remains substantial in Portugal and is no longer being reduced in Spain, Greece and France due to the weakening of activity and exports in the euro zone. Indeed, rising unemployment is pushing down real wages in Italy, Spain, Greece and Portugal while companies everywhere remain cautious and are investing little.

So a depressive dynamic is emerging: declining activity and falling wages without any improvement in fiscal or external deficits. This has given rise to a growing view that action needs to be taken to boost growth in the euro zone. We will therefore draw up a list of policies that could stimulate growth in this region and gauge the likelihood of these being introduced.

The (possible/likely) policies to stimulate euro-zone growth

1. Faster wage growth in Germany

Rather than an explicit economic policy, this is more the effect that full employment and high corporate profitability have on wage growth in Germany. Indeed, wage agreements reached in Germany mean an annual four per cent rise in nominal wages in 2012, or around two per cent in real terms, is conceivable. Our research suggests that every percentage point annual increase in wages in Germany results in a EUR 14 bn income injection.

2. Fiscal stimulus in Germany

Whereas other euro zone countries are having difficulty reducing their fiscal deficits, Germany has virtually eliminated its deficit. A coordinated fiscal policy in the euro zone, therefore, could involve a more expansionary fiscal policy in Germany. Indeed, a one percentage point of GDP rise in Germany’s fiscal deficit would amount to an income injection of around EUR 30 bn – a bigger boost to euro zone growth.

3. European investments

It is often suggested that, since euro zone countries have no more leeway to boost their economy, stimulus needs to be carried out at the European level, either in the form of additional investments by the EIB or in the form of additional investments by European structural funds. A 10 per cent increase in investments both by the EIB and European structural funds (excluding agricultural policy) would mean an additional EUR 14 bn of investment per year.

4. Driving down long-term interest rates through ECB government bond purchases

Spain and Italy are faced with considerably higher long-term interest rates than their growth rates, which is crippling their economies. Direct purchases of Spanish and Italian government bonds by the ECB would help to drive down their interest rates, so the Securities Markets Programme (SMP) should be reactivated for substantial amounts. Indeed, this has proved successful in the United Kingdom where massive purchases of Gilts by the Bank of England have kept long-term interest rates very low despite the magnitude of the country’s fiscal deficit. Central banks can control long-term interest rates if they are willing to buy the necessary quantity of government bonds.

5. A third VLTRO

The three-year repos in December 2011 and February 2012 enabled Spanish and Italian banks to obtain cheap funding at one per cent and finance massive purchases of domestic government bonds, which resulted in a temporary fall in interest rates on these bonds.

A fresh long-term repo would have two positive effects. It would help to finance the external deficits of Spain and Italy (and also those of other countries) as well as contribute to the financing of the fiscal deficits in Spain and Italy.

6. A cut in the euro repo rate

There is still some room for manoeuvre for a cut in the euro repo rate while maintaining a big enough margin between the repo rate and the deposit rate at the ECB. A 25 or 50 basis point cut in the repo rate would be justified in light of the euro zone’s growth outlook and the muted rise in unit wage costs. The cut would likely lead to a depreciation of the euro and bolster growth. We have projected that a 100 basis point cut in the repo rate would increase euro zone growth by 0.2 percentage point per year for two years with a 50 basis point cut by 0.1 percentage point per year.

7. Sharp depreciation of the euro

Even after its recent fall, the euro is still overvalued by around 10 per cent.

Despite the lack of buyers, the euro is depreciating only slightly because the euro zone has no external borrowing requirement. In order to obtain a sharp depreciation of the euro, the ECB would have to accumulate substantial foreign exchange reserves (mainly in dollars) without sterilising these reserves, i.e. adopting the same policy as emerging countries, Japan and Switzerland.

While a depreciation of the euro would increase activity in the euro zone as a whole, it would do little to benefit the least industrialised euro zone countries (Greece, Spain, and even France).

So which measures are likely to be implemented?

Faster wage growth in Germany is already taking place and an increase in European investments is very likely. Moreover, considering the growth outlook and the rise in long-term interest rates, a third very-long-term repo (VLTRO 3) and a cut (25 to 50 bp) in the refi rate are also likely.

However, we do not believe Germany will introduce a fiscal stimulus package (due to the refusal by the Germans to “pay for the others”), nor will there be a reactivation of the SMP (the monetisation of public debts jars with the ECB and Germany), nor foreign-exchange interventions to drive down the euro (due to the resulting monetary creation, since it would not be sterilised).

Meanwhile, the effectiveness of a VLTRO 3 is questionable: do the banks want to buy more government bonds at a time when interest-rate risk is still high and there will be other stress tests on government bond portfolios in the future?

We are therefore  left with a stimulus consisting in EUR 14 bn in wages in Germany, EUR 14 bn in European investments and a 25 to 50 bp cut in the repo rate, which could add 0.2 percentage points per year to euro zone growth at best.

Patrick Artus

A graduate of Ecole Polytechnique, of Ecole Nationale de la Statistique et de l'Adminstration Economique and of Institut d'Etudes Politiques de Paris, Patrick Artus is today the Chief Economist at Natixis. He began his career in 1975 where his work included economic forecasting and modelisation. He then worked at the Economics Department of the OECD (1980), before becoming Head of Research at the ENSAE. Thereafter, Patrick taught seminars on research at Paris Dauphine (1982) and was Professor at a number of Universities (including Dauphine, ENSAE, Centre des Hautes Etudes de l'Armement, Ecole Nationale des Ponts et Chaussées and HEC Lausanne).

Patrick is now Professor of Economics at University Paris I Panthéon-Sorbonne. He combines these responsibilities with his research work at Natixis. Patrick was awarded "Best Economist of the year 1996" by the "Nouvel Economiste", and today is a member of the council of economic advisors to the French Prime Minister. He is also a board member at Total and Ipsos.

Website: cib.natixis.com/research/economic.aspx

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