Thursday 18th December 2014
NEWS TICKER: WEDNESDAY, DECEMBER 16TH 2014: GEA Group Aktiengesellschaft is one of the largest suppliers for the food processing industry, following the sale of the Heat Exchangers Segment at the end of October this year, Klaus Hunger, chairman of the General Works Council of the former GEA Heat Exchangers Segment, has announced his retirement from the GEA Group Supervisory Board. By order of the local court of Düsseldorf, Brigitte Krönchen, deputy chair of the GEA Farm Technologies Works Council, was appointed to the as the new employee representative. - On a seasonally adjusted basis, the US Consumer Price Index for All Urban Consumers declined 0.3% in November after being unchanged in October, according to the Bureau of Labor. The index for all items less food and energy increased 0.1% last month after rising 0.2%in October - Methorios Capital, an Italian based independent financial services company, has listed on the Alternext market in Paris, with the direct listing of the existing 133,436,181 shares. The admission price of Methorios Capital shares was set at €0.63 per share. Market capitalisation was €84.1mon on its debut. Fabio Palumbo, Chairman of Methorios Capital, says “This listing allows the company to increase its international visibility, the share liquidity and guarantee new capital raising opportunities to finance its growth.” - Nasdaq today announced that LifeSci Index Partners, LLC, will list two new exchange-traded funds, the BioSharesTM Biotechnology Clinical Trials Fund (Symbol: BBC) and the BioSharesTM Biotechnology Products Fund (Symbol: BBP), on The Nasdaq Stock Market. BBC and BBP will begin trading today. "The landscape of the biotechnology sector has experienced dramatic shifts since the initial public offerings of Cetus and Genentech in the early 1980s," says Paul Yook, co-founder of LifeSci Index Partners. "Our BioShares funds are designed with the current biotechnology market in mind and offer investors unique and diversified portfolios of entrepreneurial biotechnology stocks by applying our rules-based index methodology." Both funds employ an equal weighting approach that allows each security's performance to affect the ETF equally, regardless of the size of the company. In this way, a relatively small firm enjoying a major breakthrough can have a meaningful impact on the ETF. An equal weighting also serves to minimize the outsize impact that a handful of mega-cap biotech companies can have on more traditional, market-cap weighted indexes. - According to Platon Monokroussos, head of research at Eurobank, “Taking their cue from the negative tone in Asia earlier today, major European stock markets stood in a negative territory in early trade on Wednesday pressured by persisting Russia jitters and the continued downtrend in oil prices amid oversupply concerns. The FOMC holds its final meeting of the year today. The policy announcement is scheduled for 20:00 CET and market focus is on whether the FOMC will drop its commitment “to maintain the 0 to ¼% target range for the federal funds rate for a considerable time following the end of its asset purchase program” - The first round of voting for the election of the new President of the Hellenic Republic in the 300-seat Parliament is scheduled to take place this evening at 19:00 Athens time (EET). As per Article 32 of the Constitution of Greece, a 2/3rd majority of the number of seats is required for the election of the new President i.e., 200 in-favour votes. Recall that Greece’s two-party coalition government currently enjoys the support of 155 lawmakers; center-right New Democracy controls 127 seats and PASOK 28. The coalition government has nominated former EU Commissioner Stavros Dimas for the presidential post – The UK’s Water Services Regulation Authority's (Ofwat’s) final determination on price limits for UK water companies over the forthcoming five-year control period 2015-20, which was announced on December 12th, remains challenging but in line with expectations, says Moody's in a report published today. The main difference is a further 10 basis-point reduction in the allowed wholesale return, resulting in an overall allowed return for the business as a whole (including wholesale and retail activities) of 3.74%, compared with 3.85% in the draft determination and 5.1% in the current period. However, the ratings agency says negative implications of the additional 10 basis-point reduction are somewhat offset by other positive changes from the draft determination stage, including an adjustment for cost inflation on retail cost allowances from 2012-13 to 2013-14. Moody's notes that United Utilities Water Limited (A3 stable) and Thames Water Utilities Ltd (Baa1 negative) benefitted from significant changes to their overall total expenditure allowances between draft and final determination, and, in the case of Thames Water, a company-specific uncertainty mechanism related to the Thames Tideway Tunnel project. Similarly, Moody’s says Southern Water Services Limited (Baa2 negative) achieved a significant improvement in the legacy adjustment related to its performance in the current regulatory period. Conversely, Bristol Water plc (Baa1 stable) remains the relative loser of the final determination, as it faces the largest relative reduction in wholesale total expenditure allowance compared with the company's plan. The gap between Bristol Water's proposed wholesale total expenditure versus Ofwat's final determination allowances is 32%, making a referral to the Competition and Markets Authority likely – Bloomberg reports that Jefferies Group is moving to shed the commodities and financial-derivatives business that it bought from Prudential Bache in 2011. Jefferies says it's getting out of the business because of high costs and dwindling fees – California’s SunEdison, Inc says it has closed its second fund for distributed solar photovoltaic (PV) generation projects in the United States with Barclays and Citi. The lease pass-through fund is valued at $117m, and follows on the Barclays and Citi fund closed earlier this year. This brings the aggregate value of funds closed this year with Barclays and Citi for SunEdison and TerraForm Power's distributed generation projects to $290m. The fund will provide financing for a portfolio of distributed generation PV projects in 12 states across the West Coast, mid-Atlantic, New England, Hawaii and Puerto Rico. The projects are expected to be operational in the fourth quarter of 2014 through the first half of 2015. Upon mechanical completion, the projects will be sold to TerraForm Power – Emolument.com, the salary benchmarking site has examined bonus data from 322 VPs working in front office in Asset Management in Europe. It finds London’s salaries are the highest –with a strong culture of incentivising staff, “bonuses in London are the chunkiest in Europe” says the firm. However, salaries are higher in Geneva (at a 23% premium to London). VPs in Amsterdam earn as much as those in Paris says the firm - According Sino news service Red Pulse, Baidu will invest $600m in the taxi start-up, marking the tech giant’s official entry into the taxi app space, a year after Tencent and Alibaba announced their investments in taxi apps DidiTaxi and Kuaidi Taxi respectively. This recent acquisition marks yet another push from Baidu to compete in the mobile payment and O2O market sectors. Baidu launched its third-party payment platform, Baidu Wallet, in April 2014, competing with Alibaba’s Alipay and Tencent’s Tenpay platforms. Baidu also has an investment in the travel website Qunar, which in addition to Baidu Wallet, also offers the option for payment through other platforms. Some industry sources believe that this new investment will be no different and that Uber will likely remain open to other payment channels. Even if this is not the case, Baidu Wallet will continue to face considerable hurdles. While the company has grown a strong client base through its mapping app, it has yet to prove that it can transform passive consumers to active ones, willing to make a purchase through its platform - Russia continues to take a beating in the FX trading markets. The depreciation of the Ruble this year is unprecedented and while it has also put pressure on other emerging market currencies, Russia is the fall guy in today’s markets, while the USD and JPY are both benefactors of safe haven investment flows. The euro found its footing as it attempted to rally back above 1.2500 following better than expected PMI readings and a huge jump in the German ZEW economic sentiment survey, though it is looking toppy and selling is now expected - UK economic news flow has tended to be better than analysts expect over the last couple of months and aside from a very downbeat inflation report and inflation expectations, the rest of the economy is maintaining a firm pace of growth. The issue however is the role inflation plays in the BOE’s policy outlook, currently inflation at 1% is well below the BOE’s target of 2%, and concerns are inflation will decline further before recovering, this is likely to impact the BOE’s progression to raising interest rates and as such will have ongoing implication on the value of GBP. For now GBP is marginally firmer on the morning.

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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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