Tuesday 31st March 2015
NEWS TICKER: MONDAY MARCH 30th 2015 : According to LuxCSD several unions in Argentina have called for a strike on tomorrow. It is still not known whether the Central Bank of Argentina, Caja de Valores as Central Depository and/or the Argentine Stock Exchange will adhere to this strike, and of the possible impact on settlement and cash operations. Citi, which is LuxCSD’s custodian, will be keeping the securities depositary updated on developments. LuxCSD says its customers are advised to take into consideration the possibility of disruption and delays in the settlement and cash processes - Capital Intelligence (CI) has affirmed Bahrain's Long-Term Foreign and Local Currency Ratings of 'BBB' and its Short-Term Foreign and Local Currency Ratings of 'A2'. The Outlook for Bahrain's ratings was revised to 'Negative' from 'Stable'.Deterioration in the public finances in view of the country's dependence on declining oil revenues, in addition to continued increase in debt levels. b) Deterioration in current account position in view of the decline in the value of oil exports, which limits the country's shock absorption capacity. Reflecting rising public expenditure and declining international oil prices, the budget deficit is expected to have doubled to 6.8 per cent of GDP in 2014 and is on course to exceed 12 per cent in the coming years, assuming no change in key policies and an average oil price of $50 per barrel in 2015-16. The central government budget structure remains weak in view of the lack of diversification of government revenue (oil accounts for around 88 per cent of central government revenue), and the absence of fiscal consolidation measures in view of the polarised political climate. Spurred by growing deficit, central government debt level continued its increase reaching 47.1 per cent of GDP in 2014, compared to as low as 21.4 per cent of GDP in 2009, while it is expected to top 69.2 per cent of GDP in 2016. Gross financing needs are also expected to increase to a still manageable level of 18.5 per cent of GDP in 2016, compared to 7.5 per cent of GDP in 2013 - French operator Bouygues Telecom says it will roll out one of the first implementations of LoRa low-power WAN technology, designed specifically to support the Internet of Things (IoT) connectivity, in France by June. The underlying technology was developed by French company Cycleo. The purpose of an IoT-specific wireless networking technology is primarily to be as low-power as possible. Many IoT implementations will be industrial, embedded use-cases where replacing power sources is expensive and impractical. Bouygues has been trialling LoRa in Grenoble since 2013 and expects 500 towns and cities to be covered by year end. KPN, Swisscom, Belgacom and Fastnet are also reported to be ready to deploy LoRa networks or carrying out large-scale trials. “The Internet of Things is going to transform entire areas of our economy, says Olivier Roussat, Chairman and CEO of Bouygues Telecom in an official statement - Moody's has today assigned a Baa2 long-term rating to the new hybrid securities issued by Bayer AG. The rating outlook is stable. The rating of Baa2 is two notches below Bayer's A3 senior unsecured rating. This reflects the deeply subordinated ranking of the new hybrid securities in relation to the existing senior unsecured obligations of Bayer or those issued by its subsidiaries and guaranteed by Bayer. The new hybrid securities will be senior to common shares - The Straits Times Index (STI) ended +4.16 points higher or +0.12% to 3454.26, taking the year-to-date performance to +2.65%. The FTSE ST Mid Cap Index gained +0.10% while the FTSE ST Small Cap Index gained +0.03%. The top active stocks were SingTel (-1.13%), UOB (-0.13%), DBS (+0.30%), Global Logistic (+0.76%) and CapitaLand (+1.39%). The outperforming sectors today were represented by the FTSE ST Consumer Goods Index (+0.89%). The two biggest stocks of the FTSE ST Consumer Goods Index are Wilmar International (-0.61%) and Thai Beverage (+3.36%). The underperforming sector was the FTSE ST Telecommunications Index, which declined -1.05% with SingTel’s share price declining -1.13% and StarHub’s share price declining-0.23%. The three most active Exchange Traded Funds (ETFs) by value today were the DBXT S&P/ASX 200 ETF (unchanged), STI ETF (unchanged), DBXT FTSE Vietnam ETF (+1.19%) – The Singapore Exchange (SGX) says that UOB Bullion and Futures Limited (UOBBF) has joined as a trading member of its securities market. Chew Sutat, head of sales and clients, SGX says the membership enables UOBBF to offer “another product class to their regional clients, thus adding to liquidity in the securities market. We also look forward to working with UOBBF to bring their existing derivatives customers to all our markets. As an SGX Securities Trading Member, UOBBF will be able to offer equity trading services to institutional clients, and accredited and expert investors. SGX now has 27 trading members and 26 clearing members - Taking their cue from the positive tone in Wall Street on Friday, major Asian equity markets were firmer today favoured by market expectations for the adoption of further policy stimulus by Chinese authorities to support domestic economic activity. Elsewhere, US Treasuries were modestly firmer in early trade on Monday while the FOMC Chairman’s mildly hawkish remarks assisted the USD to move higher says Eurobank’s mid-morning markets review. According to the bank discussions between Greek authorities and the Brussels Group on a fully-costed list of reforms the Greek side submitted late last week are reportedly expected to continue on Monday for the third consecutive day. Local press reports suggested today that a number of issues still remain open. On the latter, local newswires quoted an unnamed high level euro area official as saying that the Euro Working Group will likely assess Greece’s reform proposals later this week (reportedly on Wednesday) but euro area finance ministers are not expected to convene before all the details are ironed out. Meanwhile, Prime Minister Alexis Tsipras has reportedly requested an extraordinary plenary session to be held today at 8pm Greek time to inform the Hellenic Parliament about the progress of ongoing discussions with the Institutions - Standard & Poor's revised last Friday the outlook on the Republic of Cyprus sovereign credit rating to positive from stable, affirming the country's B+/B long- and short-term foreign and local currency sovereign credit ratings - Nearly two thirds (61%) of small and medium sized companies who are yet to undertake auto enrolment say they would welcome the publication of a definitive list of pension providers that accept all firms - regardless of size - to help them comply with their auto enrolment duties, according to new research* by workplace pensions provider NOW: Pensions. Of the SMEs surveyed who are yet to stage, two thirds (66%) don’t have any existing pension arrangements for their staff while 8% have a stakeholder pension scheme set up but don’t have any members of staff in it. A quarter already offer a scheme to a proportion of their workforce. When it comes to selecting a pension provider for auto enrolment, over a quarter (27%) of those who are yet to stage still say they haven’t given any thought to how they’ll go about finding a pension provider, down from 44% in 2014**. One in ten (12%) are going to search the market and do the research themselves, up from just 4% of those firms surveyed in 2014. When it comes to seeking external advice, over a quarter (26%) intend to get help from their accountant up from 14% in 2014. One in six (16%) intend to rely on their existing provider, down from 22% in 2014. Just 6% plan to speak to a financial adviser up from 5% in 2014. Morten Nilsson, CEO of NOW: Pensions said: “As smaller companies begin to tackle auto enrolment, the number planning on choosing their pension provider without any advice is inevitably going to grow. “This is why The Pensions Regulator’s (TPR) decision earlier this month not to publish a list of pensions schemes that are directly available to any employer, was so disappointing. The reality is these firms urgently need help to find high quality, low cost providers that are willing to accept their business, and the regulator needs to hear their pleas before it is too late.” - Harkand has secured a multi-million pound contract with Maersk Oil North Sea Ltd for the provision of DSV services in the North Sea region. The 12-month contract will be serviced by Harkand’s two DSVs, the Harkand Da Vinci and Harkand Atlantis, supported by project management and engineering from the firm’s Aberdeen office. The contract covers well tie-ins, structure installation, piling, flexible flow line lay, flexible riser installation, pre-commissioning, riser recovery, decommissioning and general inspection, repair and maintenance (IRM) work. Harkand Europe managing director, David Kerr explains, “This contract win is a further acknowledgment, not only of the expertise and capacity we have built up within the region, but also the open culture that we have at Harkand. We look forward to delivering a consistent and cost efficient service to Maersk, which is especially critical in today’s business environment. By utilising both our sister DSVs, we will provide a robust and fully flexible approach to executing both planned and unplanned interventions and we will work closely with Maersk to ensure safe and successful campaigns.” The Harkand DaVinci and Harkand Atlantis are both equipped with state-of-the-art saturation diving systems, 140t active heave compensated cranes and Super Mohawk ROV spreads -Alcatel-Lucent has announced a partnership with China Telecom to roll out the operator’s FDD-LTE services to 40 additional cities across 12 Chinese provinces. The French infrastructure vendor said it is one of three suppliers to have been chosen by the telco, and will provide its LTE mobile ultra-broadband access technology to complete the project.

Blog

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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