Tuesday 7th July 2015
NEWS TICKER: MONDAY, JULY 6TH: Moody's Interfax Rating Agency (MIRA), which specialises in credit risk analysis in Russia, has withdrawn the Baa1.ru national scale rating of Petrocommerce Bank (OJSC) based in Russia (Ba1 negative). This action follows Petrocommerce Bank's reorganisation and merger with Bank Otkritie Financial Corporation PJSC (deposits/senior unsecured Ba3 negative, BCA b1). Moody's Interfax Rating Agency's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks, report Moody’s. NSRs differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".ru" for Russia. - PEGAS, the pan-European gas trading platform operated by Powernext, today announced that a total volume of 68.9 TWh were traded in June 2015. This represents a year on year increase of 41% (June 2014: 48.8 TWhPEGAS, the pan-European gas trading platform operated by Powernext, today announced that a total volume of 68.9 TWh were traded in June 2015. This represents a year on year increase of 41% (June 2014: 48.8 TWh).Overall spot trading volumes amounted to 28.4 TWh which represents a year on year increase of 31%. PEGAS recorded volume increases in particular in the German, French and Dutch market areas. The June volume in the German GASPOOL and NCG areas increased to 12.0 TWh (+33%), including 3.6 TWh traded in quality-specific gas products. The volume in the French PEG Nord and TRS market area rose to 8.0 TWh (+40%). The Dutch TTF spot volume reached 8.1 TWh (+17%) while the Belgian ZTP spot market registered a volume of 222,715 MWh. The total volume of spread transactions amounted to 2.3 TWh. - Clearstream has issued an update to the Statement of Holdings report (MT535), covering both HTML and CSV formats: effective immediately the newly added column, “Pledged for Collateral” for non-available positions (introduced as part of the June release) will be renamed "Pledged for Collateral NAVL". This change applies to the Statement of Holdings report (MT535) in HTML format and when downloaded as a CSV file. Other reporting formats are not impacted, says Clearstream. In addition, when downloaded as an MT535 CSV file, the newly named column "Pledged for Collateral NAVL" will now appear as the final column. This allows a better reconciliation of positions, says Clearstream Banking - Christine Lagarde, managing director of the International Monetary Fund (IMF), made the following statement today: "The IMF has taken note of yesterday’s referendum held in Greece. We are monitoring the situation closely and stand ready to assist Greece if requested to do so.” - Morgan Lewis is enhancing its United Kingdom and global employment law capabilities with the addition of employment investigations and data privacy partner Pulina Whitaker, who joins the firm today from another global law firm. Her arrival, says the firm, strengthens the full suite of global client services offered from the Morgan Lewis London office, including those connected to finance, corporate, energy, funds, and litigation - Leading shares in European bourses will continue to struggle today as investors look for direction from European leaders over their response to the Greek referendum decision yesterday. In Asia, Japan’s Nikkei retreated -2.08% while Hong Kong’s Hang Seng went down by 4% and the Shenzhen Composite down by 4.69%. The Shanghai Composite stabilised around 3,709, up 0.61%, as China Security Finance Corp, the institution which managed short selling and margin trading, will receive a capital boost to 76bn “to maintain financial market stability and expand its business".; it is actually something of a turnaround, as Chinese equities have been under pressure for over a month now. In Australia, equity markets are trading into negative territory with the S&P/ASX down -1.14% while AUD/USD broke to the downside the strong support lying at 0.7533 (low from April 2) and is heading toward the following one at 0.7414 (low from October 2010). Tomorrow, the Reserve Bank of Australia will release its interest rate decision. The US dollar is broadly higher against G10 as only the Japanese yen is adding gains versus USD. German Chancellor Angela Merkel will meet French president François Hollande later today. Greece’s main creditors have more pressures on their shoulders; analysts suggest that they will be more willing to provide significant debt relief measures. The next payment is due to the ECB on July 20th.

Latest Video

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

Related News

Related Articles

Related Blogs

Related Videos

Current IssueSpecial Report

Tweets by @DataLend

DataLend is a global securities finance market data provider covering 42,000+ unique securities globally with a total on-loan value of more than $1.8 trillion.

What do our tweets mean? See: http://bit.ly/18YlGjP