Tuesday 24th May 2016
News ticker: Monday, May 23rd: Morningstar has upgraded the Schroder Japan Growth investment trust to a Morningstar Analyst Rating™ of Gold. The investment trust previously held a Silver rating. Peter Brunt, senior manager research analyst at Morningstar, comments: “The fund previously held a Silver rating. We continue to hold fund manager Andrew Rose, the supporting team and the structured process in high regard. Our concerns over the use of gearing have decreased over time, and we no longer see a reason to hold this closed-end vehicle at a differentiated rating to the identically managed Schroder Tokyo OEIC. The fund is therefore upgraded to Gold.” - The SYRIZA/ANEL coalition government secured late yesterday parliamentary approval of a key multi-bill incorporating the legislation required for the implementation of the remaining prior actions attached to the 1st programme review - Turkey’s Halk Bank has partnered with: Intellect Design Arena Limited to automate their Debt Management processes. Intellect’s Debt Management System will enable the Bank to manage its collections and recoveries more effectively and efficiently. The global lending portfolio is expected to be $38trn by 2019, growing at an average of7.9% CAGR. With increasing loans and high expected levels of delinquency, there is an increasing emphasis on strong debt management processes to devise powerful strategies for timely collection. Banks are spending to acquire customers and retain them on the one side, and on the other, they are also spending on collecting owed debt - Following what the asset manager describes as steady growth in the assets of the Threadneedle UK Absolute Alpha Fund, Columbia Threadneedle says it is currently monitoring flows in the fund with the potential to apply further containment measures. The Threadneedle UK Absolute Alpha Fund is managed by Mark Westwood and Chris Kinder, the fund takes long and short positions to deliver an absolute return to clients. As of end April 2016 the fund was £988m, having grown from £373m a year ago. Gary Collins, head of Wholesale, EMEA, at Columbia Threadneedle Investments says. “Our priority is always to protect the interests of existing investors and we have ceased marketing activity and new client pitches over the past year to manage inflows into the Threadneedle UK Absolute Alpha Fund. We are now monitoring new flows with the potential to apply further measures to limit demand if necessary to ensure the investment integrity of the fund is retained.” - Moody's has today withdrawn the A3 issuer rating of BP Finance PLC, a wholly-owned subsidiary of BP plc (rated A2, positive outlook) for what it says are business reasons - Dragon Capital, says it will list its flagship fund, Vietnam Enterprise Investments Limited (VEIL), on the main market of the London Stock Exchange sometime in July this year. Launched in 1995, VEIL is the largest and longest-running fund focused on Vietnam with a Net Asset Value (NA) of approximately $850m. The London listing is expected to create a more transparent and liquid market in VEIL's shares, widening potential ownership, attracting greater analyst coverage, increasing VEIL's profile and narrowing the discount to NAV at which the shares currently trade. Approximately half of VEIL's NAV is represented by stocks which are at their foreign ownership limits and cannot otherwise be accessed by foreign investors. The move is timely: Vietnam’s GDP rose 6.7% last year – Guaranty Trust Bank plc (GTBank) says it has redeemed the outstanding portion of its $500m eurobond notes due on May 19th. The bank issued a cash tender offer back in February to repurchase all the outstanding eurobond notes (priced at 7.5%), which it says was well received by investors. The issue was the first involving a Nigerian issuer and was secured by its subsidiary GTB Finance, set against an irrevocable bank guarantee. A statement from the bank issued yesterday, an aggregate principal amount of $126,586,000 of the securities were successfully tendered. The outstanding was redeemed from the bank’s cash reserves – Elsewhere in Nigeria, the Federal High Court has ordered former Minister of Finance, Dr. Ngozi Okonjo-Iweala and the federal government to give account of how NGN30trn that accrued to government during the last four years of the former President Goodluck Jonathan's administration was managed.‎ Presiding judge, Justice Ibrahim Buba said in a statement that the former minister of finance and the government should have made the requested information available about the money or given reasons why it could not be obliged within the stipulated period in conformity with the Freedom of Information Act.‎ ‎The judgement was released in a formal statement by civil rights group, Socio-Economic Rights and Accountability Project (SERAP)‎ through the office of its deputy director, Olukayode Majekodunmi, saying it embarked on the suit, tagged: FHC/L/CS/196/2015, ‎following the allegations by the former governor of Central Bank of Nigeria (CBN), Charles Soludo, that at least NGN30trn "has either been stolen or unaccounted for, or grossly mismanaged over the last few years under the watch of Dr Ngozi Okonjo-Iweala. At the same time, local press report that ex-President Jonathan Goodluck may have gone into exile in the Cote d’Ivoire. It seems that the Economic and Financial Crimes Commission (EFCC) is about to arrest him to face corruption charges, which would signal a total turnaround for the president whose administration was based on tackling graft in the country - US monetary policy continues to exert its influence on markets. Trading volumes are thin anyway, but clearly there is a risk off sentiment running through and this won’t change until the next FOMC meeting decision; it might be that the market has now factored in a rise in June despite mixed data emanating from the US. Right now, there are more pressing worries about the outcome of the upcoming G7 meeting, with expectations that the group will fall apart over the application of monetary policy. The outcome of the Ise-Shima G7 summit on May 26th and 27th will weigh on markets for most of this week as the US talks increasingly stridently about the ‘threat’ of competitive currency devaluation. What is a central bank with a rising currency such as the yen and declining exports (down 10.1% in April on a year on year basis) meant to do? The other worrying trend is the increasingly racist and toxic tone of the Leave camp in the Brexit campaign. How many insults can be directed at ‘foreigners’ in the UK without someone calling for restraint? - Asian markets had a mixed day. That inverse relationship between the yen and the Japanese stock market was still writ large today. The Nikkei 225 closed down 81.75 points, or 0.49 percent, at 16,654.60, retracing earlier losses of more than 1.5%, while the dollar-yen pair ultimately retreated to 109.75/$1.00. The Kospi rose 0.39% but the Hang Seng lost 0.38% over the day. The Shanghai Composite rose 0.66% while the Shenzhen Composite did better, rising 1.45%, across the water the ASX200 was down 0.6%. The Straits Times Index (STI) ended 3.11 points or 0.11% higher to 2766.93, taking the year-to-date performance to -4.02%. The top active stocks today were DBS, which gained 0.53%, Global Logistic, which declined 1.64%, SingTel, which gained 0.78%, OCBC Bank, which gained 0.36% and UOB, with a0.56% advance. The FTSE ST Mid Cap Index declined 0.08%, while the FTSE ST Small Cap Index rose0.14% - Today, traders will be watching PMI data from France, Germany, and headline eurozone.

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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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