Thursday 11th February 2016
NEWS TICKER: Following a recent Morningstar Analyst Ratings meeting, the firm has downgraded the Morningstar Analyst Rating for the L&G All Stocks Index Linked Gilt Index fund to Bronze. The fund previously held a Silver rating. Jose Garcia Zarate, senior fund analyst at Morningstar says, “We continue to have a positive view on the fund’s price, its tracking accuracy, and the parent company’s commitment to the provision of passive investing solutions. However, we have concluded that the heavily long-dated nature of the underlying market exposes investors to a volatile return profile over a market cycle. In particular, a rules-based passive fund tracking this market is particularly vulnerable to the downside relative to category peers that have the discretion to tweak duration. As such, we feel a Bronze rating reflects more accurately our conviction in this fund’s ability to outperform its category peers over a full market cycle.” - The US Commodity Futures Trading Commission (CFTC) says it has rescheduled the Technology Advisory Committee (TAC) public meeting to Tuesday, February 23rd, from 9:45 a.m. to 3:45 p.m., at CFTC’s Washington, DC headquarters. The meeting was originally scheduled for January 26, but was cancelled because Federal Government offices in the Washington Metropolitan Area were closed due to inclement weather. The TAC will discuss: the CFTC’s proposed Regulation Automated Trading (Reg AT); swap data standardisation and harmonization; and blockchain and the potential application of distributed ledger technology to the derivatives market. The CFTC says members of the public who wish to submit written statements in connection with the meeting should submit them by Monday, February 22nd - Greek Prime Minister Alexis Tsipras has called a ministerial meeting this morning to discuss the latest key domestic developments including the open issues whose implementation is required for the completion of the 1st programme review as well as farmers’ escalating protests against the planned overhaul of the income tax and the social security pension system, says Eurobank in Athens. Minister of Finance Euclid Tsakalotos warned earlier this week that the programme review should conclude by the end of February noting that Greece will be “in trouble” if it carries on into May-June - India’s Power, coal and renewable energy minister Piyush Goyal yesterday offered a $1trn prize to Australian power and energy firms to come and invest in the country’s power sector. Goyal's pitch comes as the government is pegging economic growth at 7.3% for Q4 2015, marking a slight drop on previous quarters but still outpacing China. Goyal says India's power sector is at an inflection point as the Modi government is focusing on structural reforms with an integrated outlook for the energy sector – Tomorrow (February 11th), the Latvian parliament (Saeima) will hold a vote of confidence on the new composition of the Cabinet of Ministers set up by incoming premier Māris Kučinskis. The first ceremonial sitting of the new government will be held tomorrow at 15.00 in the Green Hall of the Cabinet of Ministers. Ināra Mūrniece, acting president and speaker of the Saeima will also participate in the sitting - freemarketFX, the currency exchange, has appointed services veteran Rich Ricci as Chairman. Formerly CEO of Barclays Corporate and Investment Banking - JP Morgan Asset Management has appointed Paul Farrell as head of UK Institutional Clients. Based in London, Farrell will join JPMAM in April and will report to Patrick Thomson, head of International Institutional Clients. Farrell will be responsible for leading the sales team that manages and builds client relationships with Institutional Pension Funds in the UK & Ireland. He will have responsibility for direct client relationship management in the defined benefit as well as business development in the defined contribution marketplace and will work closely with our consultant client team led by Karen Roberton. Farrell joins most recently from Dimensional Fund Advisors, where he served as Head of UK Institutional Clients and was responsible for new business development, client service and consultant relations. Before that he was head of UK Strategic Clients at BlackRock - Vistra Group, a provider of fund admin services, has bought UK-based business expansion services provider Nortons Group, the accounting and advisory service. The Nortons team, led by Andrew Norton and Pete Doyle, is joining the Vistra Group to boost their existing range of services and benefit from Vistra’s global reach. Martin Crawford, CEO of Vistra Group, says: “Offering support services to companies moving abroad is a core business for Vistra and of growing importance. Nortons has the expertise, the experienced staff, and the network to add significant value to this service line. We are very proud to welcome Andrew Norton, Pete Doyle, and their colleagues to our international team and look forward to expanding our global reach with their experience and leadership". The acquisition of Nortons is expected to complete by the end of February and will take the combined headcount of the Vistra Group, inclusive of the soon to be merged Orangefield Group, to over 2,200 staff in 39 countries - Asian markets had another tough day. Japan's Nikkei Stock Average fell 2.3% to its lowest closing level since late 2014, and reaffirming a trend across the last few months the yen remained near its strongest level against the dollar in over a year. Despite the Bank of Japan's decision last month to introduce negative interest rates, a policy that tends to weaken the local currency, the yen has strengthened in recent sessions to levels not seen since 2014. The Japanese 10-year treasury yield traded shortly in negative territory, and touched -0.08%, before stabilising above the neutral mark. The dollar was last up 0.1% against the yen at ¥ 115.00. Australia's S&P ASX 200 fell 1.2%, the downward drift being led by energy stocks. The Australian Dollar consolidated yesterday’s gains and is currently testing the next resistance, which lies at $0.71. AUD/USD up 0.21 in local trading. Other Asian currencies did well today against the dollar. The South Korean won rose 0.74%, the Taiwanese dollar edged up 0.60%, while the Indian rupiah climbed 1.05%. That uptick was not reflected in equity markets. The Topix index slid 3.02%. In Singapore the STI slipped 2.14%, while New Zealand equities were down 0.85% respectively. China's markets are still closed for the Lunar New Year holidays – The story today is all about Federal Reserve chair Janet Yellen’s testimony to the US Congress. Analysts say that the market is pricing in no further rate increases in the near future and given the volatility in the markets and the general air of panic right now among investors, it would be a catastrophic move for the Fed to raise interest rates even a quantum in coming months. Truth is that no matter how well Yellen paints the US economy is it a story of two halves: yes, job numbers are rising, but there looks to be a lot of slack in the overall economy and this is contributing to a gradual weakening of the US dollar (but not against the euro). In fact, Europe is making the US look good; hence the wild swings in investor sentiment. Still, bank stocks look to remain vulnerable for the remainder of the quarter. This week's economic calendar is light; hence the focus on the Fed. The other bit of advanced market news is that expectations are rising for a rate cut by Norges Bank. Emerging market currencies are broadly trading higher this morning. The South African rand rose 0.85% against the US dollar, with USD/ZAR back below the 16.0 mark at around 15.9350. The Russian ruble also took advantage of this respite and gained 0.65% versus the greenback, which helped USD/RUB to edge lower to 79.10. In terms of data, watch out for industrial and manufacturing production figures from France, the UK and Italy and CPI data from Denmark and Norway - In commodities, Brent crude oil was last up 2.4% at $31.05 a barrel in thin trade on speculation about possible production cuts, but remains down nearly 9% for the week and roughly 19% for the year. Peter Rosenstreich, head of market strategy at Swissquote Bank explains, "Crude oil has been able to rebound off the 12-year low ($27.78) after falling sharply by nearly 8% on Tuesday. The positive catalyst was the news that Iran has indicated that they would be willing to work with Saudi Arabia on production limits. However, markets remain sceptical of this or any coordinated production cuts. There seems to be no relief on selling pressure in sight as the US government released reports indicating that demand will remain soft by lower demand growth forecasts. In addition, the Paris based International Energy Agency (IEA) has warned that the supply glut will continue through 2016 as production cuts have been made at a slower pace than forecasted.” In other market news this morning, spot gold in London was down 0.2% at $1188.05 an ounce, while three-month copper futures on the London Metal Exchange fell 0.7% to $4,463 a ton.

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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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