Thursday 29th January 2015
NEWS TICKER: THURSDAY, JANUARY 29TH 2015: The Federal Deposit Insurance Corporation (FDIC) issued a Financial Institution Letter yesterday encouraging supervised institutions to take a risk-based approach in assessing individual customer relationships, rather than declining to provide banking services to entire categories of customers without regard to the risks presented by an individual customer or the financial institution's ability to manage the risk. The FDIC also reinforced the agency's policies on managing customer relationships to examiners and other supervisory staff. Financial institutions that properly manage customer relationships and effectively mitigate risks are neither prohibited nor discouraged from providing services to any category of customer accounts or individual customers operating in compliance with applicable laws. FDIC examiners must provide notice in writing for any case in which an institution is directed to exit a customer relationship - US mid-market investment bank BR & Co says it will release results for the fourth quarter and full year of 2014 before the market opens on Wednesday, February 11th -.Chile’s Minister of Economy, Development and Tourism, Luis Felipe Céspedes, along with General Manager Sercotec Bernardo Troncoso, made ​​a visit to the antique del Barrio Italy yesterday to introduce new programs for productive development that will display Sercotec for entrepreneurs , micro and small businesses during 2015 - Moody's de Mexico has upgraded debt ratings to Baa1 (Global Scale, local currency) from Baa2 and to Aaa.mx (Mexico National Scale) from Aa2.mx of the following five enhanced loans to the state of Chihuahua: MXN4.5bn from Banco Interacciones (original face value) with a maturity of 20 years; MXN1.38bn from BBVA-Bancomer (original face value) with a maturity of 20 years; MXN 2.03bn from BBVA-Bancomer (original face value) with a maturity of 20 years; MXN1.72bn from BBVA-Bancomer (original face value) with a maturity of 20 years; MXN3bn from Multiva (original face value) with a maturity of 17 years (MXN1.4bn disposed of). The ratings agency also assigned debt ratings of Baa1 (Global Scale, local currency) and Aaa.mx (Mexico National Scale) to the following enhanced loans: MXN1.995bn from Banorte (original face value) with a maturity of 20 years; MXN1bn from Santander (original face value) with a maturity of 20 years. All the enhanced loans are payable through a master trust (Evercore as trustee F/0152), to which the state has pledged the flows and rights to 56.98% of its federal participation revenues. All the loans under this master trust share the cash flow and are paid on a pari passu basis. - The January monthly energy review by the EIA was released yesterday evening. Preliminary estimates of US residential energy consumption suggest that for October 2014 total energy consumption equaled 1.3 quadrillion Btu, a 2% decrease from October 2013. Electricity retail sales and electrical system energy losses accounted for 73% of residential sector total energy consumption, while natural gas accounted for 16% of residential sector total energy consumption, renewable energy accounted for 6%, and petroleum accounted for 5% - Celent has released a new report, titled, IT Spending in Banking: A North American Perspective. The report is authored by Jacob Jegher, a research director with Celent's Banking practice. North American IT spending growth is rising steadily, he says, and is expected to be 4.5% higher in 2015. Growth will drop slightly in 2016 as IT spending by North American banks reaches US$64.8 billion, an increase of 4.2%. In the report, Celent examines, analyses, and contrasts the IT spending patterns of US and Canadian banks. The firm says North American bank IT spending will grow from $59.5bn in 2014 to $62.2bn in 2015. This year, the firm adds, is shaping up to be another promising one for retail banking; significant funds are still required to move forward and maintain self-service initiatives, digital banking projects/overhauls, branch transformation initiatives, and omni-channel endeavours. Additionally, mobile banking will continue to receive significant attention as banks aim to build on existing smartphone and tablet apps. Analytics, omni-channel banking, compliance/regulatory, and IT security investments will also be priorities. Spending on corporate banking will continue to climb through new component or module-based initiatives. Midsize banks are still very much looking to compete with larger banks that have invested significant amounts over the last several years. Small business is also a growing area of interest because banks still haven't figured out how to attack this distinct and attractive market segment. "The figures point to another strong year; 2015 is poised to build on the growth experienced last year," says Jegher. – The CME Group advises that the deadline to claim a SMART Click ID for GPS and BPS will be February 6th, 2015. After this date, there will no longer be an option to login with a Legacy ID and both applications will only be accessible with a SMART Click ID. Applicants can create a SMART Click ID (if you do not have one already) or claim your Legacy ID via the GPS and BPS portals and both applications must be claimed independently prior to the deadline. The CME says that after February 6th, the GPS and BPS applications will no longer be available via the CME Portal. These applications will only be available via ‘direct’ links following direct links: https://gps.cmegroup.com; https://bps.cmegroup.com; and https://login.cmegroup.com - China’s debt build up since the global financial crisis ranks as one of the largest in recent history (in the 97th percentile of debt-to-GDP changes in a sample of 55 countries over the past 50 years) according to Goldman Sachs’ latest Global Economics Weekly research report. The bank says the development is new and is a major global macro concern for investors. Deteriorating external conditions and declining investment efficiency have contributed to the debt build-up. The research team says that while the risk is significant, its analysis exploring the aftermath of large debt build-ups over the past half-century suggests that credit booms do not always end in deep recessions or banking crises. “GDP growth typically decelerates by at least 3-4pp after credit booms, although in China’s case some slowing has already occurred. Smoothing the adjustment process is likely to require increased central government fiscal outlays and policy interest rates should remain fairly low,” says the team. They add that while Chinese policy-makers have begun to address credit issues, significant imbalances still need to be worked off and capital market system development and reforms still need to be implemented more fully -

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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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