Thursday 30th October 2014
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THURSDAY TICKER: OCTOBER 30TH 2014: - In ConvergEx’s survey of financial market professional, released today, uust 17% of respondents say they approve of the job Barack Obama is doing as president, while 73% said they disapprove. (This compares with a 41% approval/54% disapproval rating for the President in the RealClearPolitics average, 10/8-10/23/2014) Half (50%) of those surveyed give the President a “D” or “F” grade on handling issues of concern to the financial services industry. Opinions of Congress are even lower, with just 8% approving of the job being done by Congress and 81% disapproving. (This compares with a 13% approval/79% disapproval rating for Congress in the RealClearPolitics average, 10/3-10/20/2014. Almost half (46%) give Congress a “D” or “F” grade on handling issues of concern to the financial services industry. 69% of respondents say they would like Republicans to be in control of the Senate following the elections, a figure above even the 65% who say they plan to vote Republican in their own House districts. By 61% to 14%, Republicans are trusted over Democrats on issues impacting the financial services industry. For 8 of 9 market sectors, a higher percentage of respondents said equities would respond positively to a GOP win than to a Democratic win. Only for the Heath Care sector do more investors expect a positive outcome in response to Democrats holding the Senate - The Commercial Bank of Qatar (CBQ) posted a net profit (before deducting minority interest) of QAR503m in 3Q2014, flat QoQ, but 79% higher than a particularly weak 3Q2013. CBQ’s operating income in 3Q2014 increased 16% YoY but dropped 10% QoQ, driven by lower-than-expected results at subsidiary ABank. ABank’s operating income tumbled around 23% QoQ as non-interest income plummeted. For CBQ excluding ABank, operating income stood at around QR 764 million in 3Q2014, up 12% YoY, down 6% QoQ - Moody's has today assigned a provisional (P)B1 corporate family rating (CFR) to Kompania Weglowa SA, the parent company of the group. This provisional rating is subject to the successful completion of the issuance of new notes as currently contemplated by management. Concurrently, Moody's has assigned a provisional (P)B1 rating with a loss-given default (LGD) assessment of 3 (46%) to the senior unsecured notes to be issued by Kompania Weglowa Finance AB (publ), a financing vehicle owned by the company. The outlook on all ratings is stable - ING Group will release its 3Q 2014 results on Wednesday November 5th around 7:00 am CET - AIMCo, Allianz Capital Partners, EDF Invest andHastings have closed its buy of Porterbrook, a UK-based rolling stock leasing company. orterbrook is one of three main rolling stock companies (ROSCOs) in the UK that owns and leases a fleet of passenger and freight rolling stock to Train Operating Companies and Freight Operating Companies under long term contracts. It owns 32 per cent of total passenger rolling stock in the UK. No financial terms were disclosed - Fixed-income markets remain volatile: Europe is challenged, Brazil might struggle, and China is dealing with a potential property bubble. Opportunities nonetheless remain rife for savvy investors, particularly in the high-yield markets. Western Asset believes high-yield should be a key component of any successfully diversified bond portfolio. "We are pretty bullish on credit in general, and high-yield in particular," says Michael Buchanan, head of Global Credit at Western Asset. "Credit is less about the overall economic environment and more about strong corporate fundamentals. Corporations can do well in a mediocre economy, and that seems to be what's happening. Three factors are important right now: the overall economic environment is supportive; strong active management allows us to identify the right opportunities; and valuations are as compelling as they have been in months. This is a good time to take a fresh look at high-yield." Western Asset also believes high-yield products will offer price appreciation as spreads should tighten. On the global economic environment, Mr. Buchanan echoed Western Asset views that interest rates are poised to rise – albeit slowly, and via a process that will be carefully measured. Rates will not be meaningfully higher in the near future, or at least the moves will be gradual – According to Moody’s while the US government's current fiscal position remains relatively healthy, mandatory social spending will begin weakening the current fiscal profile of the US government at the end of the decade. For the next few years, barring another shock like the global financial crisis, the US budget deficit is expected to remain well within historical norms with Federal government debt ratios stable. However, the fiscal implications of the US government's healthcare-related programs likely will put pressure on its credit profile before the end of the decade, absent unexpected and sustained growth in revenue due to higher than expected GDP growth, additional tax increases, or reductions in planned expenditures, says Moody’s.

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The European Review

By Patrick Artus, chief economist at Natixis

Is Greece offered any other choice to a slow death and a sudden death?

Friday, 06 July 2012 Written by 
Is Greece offered any other choice to a slow death and a sudden death? The adjustment programme that Greece is putting in place with the Troika, even if it is toned down and spread out over time, will eventually lead to a fall in Greeks' purchasing power until Greece's external deficit disappears. And in light of Greece's economic structure and the disproportion between its imports and exports, this will imply a collapse in living standards in Greece. The other possibility for Greece is to leave the euro and massively devalue its currency, but this would instantly mean a loss of purchasing power due to the deterioration of the terms of trade, and a massive decline in domestic demand, which would in any case be inevitable because there would then be no more lenders to finance Greece's external deficit. http://www.ftseglobalmarkets.com/

The adjustment programme that Greece is putting in place with the "Troika", even if it is toned down and spread out over time, will eventually lead to a fall in Greeks' purchasing power until Greece's external deficit disappears. And in light of Greece's economic structure and the disproportion between its imports and exports, this will imply a collapse in living standards in Greece. The other possibility for Greece is to leave the euro and massively devalue its currency, but this would instantly mean a loss of purchasing power due to the deterioration of the terms of trade, and a massive decline in domestic demand, which would in any case be inevitable because there would then be no more lenders to finance Greece's external deficit.

For Greece to escape a slow death (austerity programme) or a sudden death (exit from the euro), a massive European aid plan would be needed to rebuild the Greek economy and create jobs, a plan that is unlikely at present, and very different from the present bailout which merely finances debt servicing on Greek government bonds held by public investors.

The logic of the adjustment programme for Greece: Slow death



Even if Greece and the Troika renegotiate the adjustment programme, its fundamental characteristics will remain the same:

·                                  a restrictive fiscal policy to eliminate the fiscal deficit;

·                                  a fall in wages to improve competitiveness and reduce domestic demand, until Greece's external deficit disappears.

The main idea of the adjustment programme is that Greece's domestic demand exceeds its production capacity, thereby generating a structural external deficit. So Greeks "are living beyond their means", with a rise in living standards far exceeding growth in production capacity, and it is therefore legitimate to reduce domestic demand both through a restrictive fiscal policy and wage cuts.

The fall in wages could also bring about an improvement in competitiveness, hence an improvement in foreign trade, but its main objective is to reduce domestic demand and imports.

The problem with this approach is that:

·                                  it is showing its ineffectiveness: despite the decline in domestic demand, the current-account deficit has declined little; due to the shortfall in activity, public finances are no longer improving;

·                                  its cost in terms of jobs and purchasing power is gigantic. Greece is a country in which the weight of industry is very small and where, as a consequence, the disproportion between imports and exports is very great.

A substantial decline in purchasing power in Greece is therefore needed to eliminate the external deficit, with a further fall of about 30% in real wages. Purchasing power would have to be brought back to the level of the early 1990s to balance the current account, and this is of course rejected by the population. The fundamental problem is twofold:

·                                  even if there is a fall in wages, the improvement in price-competitiveness is limited by price stickiness;

·                                  since the size of industry is small, the adjustment must be achieved mainly through a fall in imports, hence a decline in income.

Exit from the euro and devaluation: Sudden death

Faced with this prospect of a "slow death" due to the austerity programme, Greeks could decide to leave the euro and devalue. But in that case the shock would be sudden and terrible, because there would be both:

·                                  a rise in import prices;

·                                  an obligation to eliminate the external deficit, because no one (neither the private sector nor the public sector) would any longer lend to Greece;

·                                  a weak positive impact of the gain in competitiveness, due to the small size of industry.

Greece would default on its gross external debt, and would therefore no longer have to service that debt, which is positive (it would gain six percentage points of GDP in interest payments on external debt). But the rise in import prices would even further exacerbate the foreign trade imbalance, while the potential for external borrowing would disappear. There would inevitably have to be a reduction in domestic demand to restore the foreign trade balance despite the rise in import prices, hence inevitably a collapse in imports in volume terms.

This is reminiscent of the process in Argentina, in similar circumstances, in the early 2000s: a collapse of activity following the huge devaluation, the need to switch to a current-account surplus which required dividing imports by three - hence a collapse in the real wage due to imported inflation, and in domestic demand and employment.

From 2003 onwards, there was  a sharp improvement in Argentina's situation, but it is important to remember that it had considerable structural advantages by comparison with Greece at present:

·                                  substantial weight of industry (22% of jobs);

·                                  before the crisis, exports and imports of the same size;

·                                  a smaller current-account deficit to reduce (five percentage points of GDP).

The shock would be far more violent and prolonged for Greece.

So what would be the solution for Greece?

We have seen that Greece is at present offered two solutions:

·                                  a "slow death", through a stifling of the economy via the austerity plan, even if it is softened down;

·                                  a "sudden death", if there is an exit from the euro and devaluation.

In either case, gradually or suddenly, there must be a substantial decline in purchasing power to eliminate the external deficit which is no longer financeable. For Greece to escape this dreadful choice, Europe's aid would have to be allocated not to debt servicing on Greece's government bonds held by public investors (EFSF, ECB) - which in and of itself is an incredible situation where Europe is borrowing in order to pay to itself the servicing of the Greek debt it holds - but to help rebuild the Greek economy and create jobs, which is definitely not being done at present.

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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