Saturday 5th September 2015
NEWS TICKER, THURSDAY, September 3rd: The Straits Times Index (STI) ended 28.3 points or 0.98% higher to 2906.43, taking the year-to-date performance to -13.63%. The top active stocks today were SingTel, which gained 0.82%, DBS, which gained 0.80%, UOB, which gained 1.40%, OCBC Bank, which gained1.13% and CapitaLand, with a 0.36%advance. The FTSE ST Mid Cap Index gained 0.55%, while the FTSE ST Small Cap Index rose 0.24% - Madrid City Hall announced it would dedicate €10m out of its 2016 budget to a "welcome plan for refugees" to include housing, integration, psychological support and legal aid, City Hall spokeswoman Rita Maestre (Ahora Madrid) said during a press conference on Thursday. Maestre said a budget had been decided upon but that specific numbers had not: "We want to welcome all those who are fleeing from war", adding that given their situation "a permanent housing solution" would be needed in the city. The Mayor of the Spanish capital, Manuela Carmena, said on Wednesday that a decision would be taken at the city government meeting today: "The city of the hug must, of course, be ready to welcome refugees" - The European Bank for Reconstruction and Development (EBRD) is joining international efforts to clean up Tunisia’s Lake Bizerte with a €20m loan and technical assistance to support the expansion and rehabilitation of the sewerage network of the Bizerte region and the rehabilitation of three wastewater treatment plants located near the lake. The EBRD’s investment is part of an integrated environmental programme aimed at de-polluting Lake Bizerte and reducing sources of pollution through investments in wastewater, solid waste and industrial effluents. This programme is labelled by the Union for the Mediterranean and is part of the Horizon 2020 Initiative, which aims to de-pollute the Mediterranean by the year 2020. The European Investment Bank is providing a €40 million sovereign loan to the programme while the European Union Neighbourhood Investment Facility is contributing a €15m grant for both capital expenditure and technical cooperation - Analysis of illicit financial flows (IFFs) by Global Financial Integrity (GFI) shows that over the period 2003-2012 the global volume of IFFs grew by more than 9% annually (. In 2012 (the most recent year for which data are available), illicit flows were estimated at close to $1trn. In response to this unfettered surge in illicit capital leaving developing nations, the UN has endorsed target 16.4 in the Sustainable Development Goals (SDGs), which commits the global community to “significantly reduce” IFFs by 2030. This UN action “represents an historic moment in development policy given that it is the first time the international community has recognized the illicit flows problem and pledged to address it,” says GFI President Raymond Baker - US Secretary of Commerce Penny Pritzker named Eduardo Leite, Chairman of the Executive Committee of Baker & McKenzie LLP, as the new chair of the US section of the US-Brazil CEO Forum. “Mr. Leite has served on the U.S. section of the CEO Forum for several years, and I am pleased that he has agreed to serve as Chairman,” said Secretary Pritzker. The new US section chair was named after the former chair, Ms. Patricia Woertz, Chairman of the Board of Directors of Archer Daniels Midland Company, submitted her resignation from the role. However, Woertz will remain a member of the U.S.-Brazil CEO Forum, and Leite will complete the current three-year term, which ends on August 13th 2016 - MarketAxess Holdings Inc. (Nasdaq:MKTX), the operator of a leading electronic trading platform for fixed-income securities, and the provider of market data and post-trade services for the global fixed-income markets, today announced total monthly trading volume for August 2015 of $75.5 billion, consisting of $43.7 billion in U.S. high-grade volume, $26.7bn in other credit volume, and $5.1 billion in liquid products volume. MarketAxess is providing both the reported and adjusted estimated US high-grade TRACE volumes on its website. The Company believes that the adjusted estimated volumes provide a more accurate comparison to prior period reporting.

Latest Video

Blog

The European Review

By Patrick Artus, chief economist at Natixis

ECB bond purchases: the case for Spain and Italy

Monday, 13 August 2012 Written by 
ECB bond purchases: the case for Spain and Italy The European Central Bank (ECB) is feeling the pressure to add to its balance sheet massive amounts of sovereign debt from eurozone countries that are in distress. Assuming that the bank was to do so, with the clear objective of sharply reducing those countries' long-term interest rates, it begs the question, would the eurozone crisis then be solved? If we were to consider this in the context of Spain and Italy, we would argue that it could only happen if the bank’s intervention not only restored the fiscal and external solvency of the countries in distress, but also revived growth. While these objectives would be fairly easily achieved in Italy, they would not rescue Spain. In fact, even a massive intervention by the ECB in government bond markets would not pull Spain out of its crisis. http://www.ftseglobalmarkets.com/

The European Central Bank (ECB) is feeling the pressure to add to its balance sheet massive amounts of sovereign debt from eurozone countries that are in distress. Assuming that the bank was to do so, with the clear objective of sharply reducing those countries' long-term interest rates, it begs the question, would the eurozone crisis then be solved?

If we were to consider this in the context of Spain and Italy, we would argue that it could only happen if the bank’s intervention not only restored the fiscal and external solvency of the countries in distress, but also revived growth. While these objectives would be fairly easily achieved in Italy, they would not rescue Spain. In fact, even a massive intervention by the ECB in government bond markets would not pull Spain out of its crisis.

Strong pressure on the ECB

The high level of long-term interest rates in Spain and Italy is stifling their economies. Strong pressure is therefore being put on the ECB to buy large quantities of government bonds issued by these countries, in the hope it will sharply reduce their long-term interest rates. This could be done directly or indirectly, perhaps by transforming the European Stability Mechanism (ESM) into a bank with funding provided by the ECB.



Massive purchases of government bonds by the ECB: Would the eurozone crisis be ended?

If massive purchases of government bonds by the ECB were to resolve the debt situation in Spain and Italy, the consequential fall in interest rates would need to restore fiscal solvency, restore external solvency and bring back acceptable growth.

Let’s look at these three points now:

1. Fiscal solvency

Fiscal solvency is ensured if the primary budget surplus is greater than the public debt multiplied by the differential between the long-term interest rate and nominal long-run growth.

If long-term interest rates were lowered by ECB interventions to close to the eurozone average, a primary surplus of 4.2 percentage points of GDP would be needed in Italy and 2.8 percentage points of GDP in Spain to ensure fiscal solvency. Italy’s primary surplus is forecast to meet 4% of GDP next year, while Spain’s primary deficit is due to exceed 3%.With lower interest rates Italy would be fiscally solvent in 2013, but by no means would Spain be.

2. External solvency

External solvency is ensured if the primary surplus (excluding interest on external debt) of the current-account balance is greater than the external debt multiplied by the differential between the long-term interest rate and nominal growth.

If the ECB moved long-term interest rates closer to the eurozone average, a primary current-account surplus of 0.8 percentage point of GDP would be needed in Italy, and 3.1 percentage points of GDP in Spain. At present, Italy has a deficit of 1.8 percentage points of GDP, and Spain has a deficit of 2.5 percentage points. As such, with lower interest rates, external solvency would not be guaranteed in Italy, while in Spain, again, the situation is far worse – external solvency would be very far from guaranteed.

3. Growth

The growth prospects are dramatic for Spain and Italy. A fall in long-term interest rates would significantly impact growth in a positive way, but only if the contraction in activity was predominately due to the high level of long-term interest rates. This would be the case if the contraction itself occurred because there was a decline in investment, rather than anything else such as job losses or deleveraging.

While consumption is declining in both countries, the decline in investment is far more dramatic in Spain than in Italy. The sharp decline in investment in Spain can be attributed to the collapse of the construction sector and the need for deleveraging, a problem which is far more acute in Spain than in Italy. As a result, a fall in interest rates would not be sufficient to revive growth in Spain, but would help in Italy.

Conclusion: Would massive purchases of Spanish and Italian government bonds by the ECB stop the eurozone crisis?

In conclusion, if the ECB were to purchase massive amounts of government bonds issued by struggling eurozone countries, a sharp fall in long-term interest rates in Spain and Italy would:

  • restore fiscal solvency in Italy but not in Spain;
  • restore external solvency in neither of the two countries, though the problem is far more serious in Spain than in Italy;
  • revive growth in Italy, but not in Spain where the decline in activity does not stem mostly from high interest rates.

Massive intervention by the ECB in government bond markets would therefore be decisive for Italy, but much less so for Spain.

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

Current Issue

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