Friday 21st November 2014
NEWS TICKER: THURSDAY, NOVEMBER 20TH 2014: Harkand has secured a multi-million pound contract with a leading independent oil and gas operator to commence work across their assets in the Southern North Sea region later this month. The deal will see Harkand mobilise their dive support vessel the Harkand Atlantis to excavate and remove existing spools and install a flexible jumper at an open water, existing subsea well location. They will also commence engineering work for production tie-back scope at the site of a new subsea well at another location. Earlier this year, Harkand delivered a successful multi-well fault-finding campaign across the Operator’s subsea assets off Humberside in the Southern North Sea. Harkand Europe managing director David Kerr said: “This contract award builds on the excellent relationship we have developed together. We are committed to supporting this important client’s needs and delivering reliable and quality services in all sectors of the North Sea.”- The Securities and Exchange Commission today announced that its Advisory Committee on Small and Emerging Companies will hold its next meeting on Wednesday, Dec. 17, beginning at 9:30 a.m. ET. The committee will focus on the interests and priorities of emerging and smaller public companies. “Small and emerging companies contribute greatly to the strength of our nation’s economy,” said SEC Chair Mary Jo White. “We welcome the valuable input of the Advisory Committee members who bring a wealth of expertise from across the small business community.” The co-chairs of the committee are Stephen M. Graham, Managing Partner in Fenwick & West LLP’s Seattle office, and M. Christine Jacobs, member of the board of directors of McKesson Corporation and former Chairman, CEO, and President of Theragenics Corporation. The full agenda for the meeting will be released before the meeting date - In trading in Japan today Yen crosses rallied to fresh highs as news emerged that the Japanese trade balance deficit narrowed from JPY958.3bn to JPY710bn in October says Swissquote. USD/JPY tested 119.00 as European traders jumped in. The bullish trend continues to gain pace, with large vanilla calls from 117.50/75 to 118.00 should give support today. Key resistance is placed at 120.00. EUR/JPY trades surged to 149.14. Deep overbought conditions (RSI at 81%) should lead to profit taking into 150.00/152.00 zone. The Fed minutes published last night pushed USD higher against all G10 and EM currencies. Minutes mentioned that the weak economic outlook in the eurozone, China and Japan should have little impact on the US recovery. Some members were concerned that the inflation may remain below the target for some more time. The US October CPI is due today (13:30 GMT), the CPI is expected to decelerate by 0.1% on month. Any positive surprise should push for further USD gains. US ten-year yields remain below 2.40%, the DXY index resists pre-88.000. Else, the Brazil mid-November inflation figures surprised on the downside. USD/BRL legged down to 2.5660. A close below 2.57 will push MACD in the red zone suggesting extension of gains for the BRL. Option bids trail above 2.5180/2.5200+ for today expiry. We remain cautious as political risks should abruptly halt BRL recovery. “Brazil inflation accelerated at the softer pace of 0.38% in mid-November print, pulling the yearly inflation down to 6.42%. The good news is that the inflation managed to step in BCB’s 4.5% (+/-2%) target band mid-November, led by weaker energy prices which certainly had a negative impact on all sub-groups. The transportation costs increased 0.20% on month to mid-November down from 0.45% in September, since the slide in global oil prices accelerated; the communication costs fell 0.21% m/m. Less comforting news is that the government-conducted rise in fuel prices (on Nov 7th) is probably not fully reflected in mid-month figures and may push the inflation back above the target range by the end of the month. In addition, the FX volatilities certainly give little comfort to the BCB, expected to proceed with additional 25 basis points rise in Selic rate at December 3rd meeting. Speculations on 50 bps hike should range sideways until 3Q GDP release due next week (Nov 28th),” notes Ipek Ozkardeskaya – Swissquote Market Analyst. Elsewhere, Ozkardeskaya says “EUR/CHF keeps trading dangerously close to 1.20 floor despite the recent polls on Gold referendum showing abrupt shift toward « no » camp. We believe that the game is most probably over at this point. EUR/CHF 1-month 25-delta risk reversals dip down below 150 bps, showing interesting opportunities in topside OTM calls.” – According to the Taiwan Stock Exchange, General Interface Solution (GIS) Holding Limited (GIS, stock code: 6456) has applied for primary listing on the Taiwan Stock Exchange. GIS is the 9th foreign company filing IPO application with Taiwan Stock Exchange this year. GIS is registered at Cayman Islands, and its paid-in capital is NTD2,860m and its net worth is NTD6,664m. GIS is mainly engaged in producing and selling of touch display modules. The company has major operations sites in both Taiwan and China. Consolidated revenue reached NTD80,329m, with net income of NTD2,304m and EPS of NTD$13.57. For the first three quarters of 2014, consolidated revenue totaled NTD51,830m, with net income of NTD785m and EPS of NTD2.84 - The Straits Times Index (STI) ended -18.96 points lower or -0.57% to 3315.6, taking the year-to-date performance to +4.76%. The FTSE ST Mid Cap Index declined -0.35% while the FTSE ST Small Cap Index declined -0.53%. The top active stocks were SingTel (-0.76%), UOB (+0.04%), DBS (-0.81%), OCBC Bank (-1.43%) and Keppel Corp (-1.29%). Outperforming sectors today were represented by the FTSE ST Consumer Services Index (-0.10%). The two biggest stocks of the FTSE ST Consumer Services Index are Jardine Cycle & Carriage (-1.51%) and Genting Singapore (+1.38%). The underperforming sector was the FTSE ST Basic Materials Index, which declined -3.64% with Midas Holdings’ share price declining -1.70% and Geo Energy Resources’ share price declining -9.55%. The three most active Exchange Traded Funds (ETFs) by value today were the IS MSCI India (-0.65%), SPDR Gold Shares (-1.07%), STI ETF (-0.30%). The three most active Real Estate Investment Trusts (REITs) by value were Suntec Reit (+0.26%), CapitaCom Trust (-0.89%), CapitaMall Trust (-0.51%) - Russian lender VTB Group reported a 90% fall in third-quarter profit, hurt by the country's economic slowdown and geopolitical tensions. The state-controlled bank said today that net profit for the quarter fell to RUB1.8bn ($38.6m), compared with RUB17.9bn in the same quarter last year. The figure is below the RUB2.8bn expected by analysts. VTB is the first big Russian bank to report earnings for the quarter, in which sanctions were ramped up and the ruble continued to tumble against the dollar. "Headwinds we continue to face have driven up provision charges and cost of risk, which remain the key factor adversely impacting VTB Group's profitability in 2014," says Andrey Kostin, VTB president and chairman of its management board in an official release. Although interest income rose 9.8% over the period, the bank applied provisions of some RUB65bn to cover potential loan losses. - Gulf-based airlines have closed financing agreements for a total of 16 Boeing and Airbus aircraft, according to local press reports. Boeing expects the Gulf region to generate orders for over 2,600 aircraft between now and 2033, with potential sales in the pipeline worth as much as $550bn for both Boeing and Europe’s Airbus. Emirates airline recently signed an AED1.1bn ($299.5m) financing deal for the purchase of two Boeing planes. First Gulf Bank, the third-largest lender by assets in the Emirates, led the club finance lease package on behalf of the airline - Equity markets are rallying into the year end and many indices trade at multi-year or all-time highs, but the dollar's strength warns against complacency in 2015, suggests investment platform provider AJ Bell. “So long as wage growth, inflation and corporate spending remain subdued central banks may be tempted to keep interest rates lower for longer than current market expectations, a scenario that will leave many investors once more searching for dependable sources of income,” posits Russ Mould, Aj Bell investment director, speaking at the 2014 AJ Bell Investival event. “Meanwhile the surge in the dollar, traditionally a haven asset, suggests markets have yet to fully recover their appetite for risk following October's stumble, when it took Japan's stunning increase in its quantitative easing (QE) programme to fend off fears of a deflationary downturn.” - Hedge funds and other creditors with claims against Iceland’s failed banks face an exit tax as the island looks for ways to unwind capital controls without hurting the economy, according to Reuters. The government hopes to having a plan in place by year-end that will scale back currency controls currently blocking about $6.6bn from exiting the island. The framework will build on analysis conducted by the central bank and external advisers, including JPMorgan Chase. Hedge funds Davidson Kempner Capital Management LLC and Taconic Capital Advisors LP are among the hedge funds reportedly making claims. The winding-up committees that represent investors have urged the government to let them sidestep the currency controls to end the payment dispute – Hong Kong’s auction of three year RMB4bn sovereign bonds held earlier today was more than four times over-subscribed. The average accepted coupon was 2.66%, within a range of 2.20% to 2.74%. The sovereign issue applied an allocation ratio of approximately 78%. The central bank’s issue of RMB3bn of five year bonds received offers worth over RMB8.9bn. The average accepted coupon was 2.91% in a range from 2.40% to 3.00%. The allocation ratio was approximately 46.77%. It’s 10 year RMB2bn bonds received offers wroth RMB7.7bn, with an average accepted coupon of 3.28%, within a range of 3.00% to 3.38%; the allocation ratio was approximately 7.69% - Sovereign data releases expected to announce today: Swiss October Trade Balance, Exports & Imports m/m, German October PPI m/m & y/y, French, German and Euro-zone November (prelim) Manufacturing, Services and Composite PMI, Euro-zone November (Advance) Consumer Confidence, Italian September Industrial Sales & Orders m/m & y/y, UK October Retail Sales m/m & y/y, US October CPI m/m & y/y, US November 15th Initial Jobless Claims & November 8th Continuing Claims, US November (Prelim) Manufacturing PMI, Philadelphia Fed November Business Outlook, US October Existing Home Sales m/m and Leading Index.

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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