Sunday 19th April 2015
NEWS TICKER FRIDAY APRIL 17TH 2015: -On June 9, 2015, the Federal Trade Commission will host a workshop to examine competition, consumer protection, and economic issues raised by the proliferation of online and mobile peer-to peer business platforms in certain sectors of the economy, often referred to as the “sharing economy.” The workshop will take place in Washington, D.C., at the FTC’s Constitution Center conference space. Peer-to-peer platforms, which enable suppliers and consumers to connect and do business, have led to the emergence of new business models in industries that have been subject to regulation. The FTC’s sharing economy workshop will explore how regulatory frameworks can accommodate new sharing economy business models while maintaining appropriate consumer protections and a competitive marketplace. “We are seeing a dramatic growth in products and services that are built on peer-to-peer platforms, such as ride-sharing and property rentals, as more entrepreneurs harness the power of technology to reach more consumers,” says FTC Chairwoman Edith Ramirez. “The resulting business models have great potential to benefit our economy and consumers. Through our workshop, we want to better understand the competitive impact of these new business models, as well as their interactions with existing regulatory frameworks.” - he Straits Times Index (STI) ended 6.42 points or 0.18% lower to 3525.19, taking the year-to-date performance to +4.76%. The top active stocks today were Keppel Corp, which declined 2.01%, DBS, which gained 0.91%, SingTel, which gained 0.23%, UOB, which gained 0.38% and ComfortDelGro, with a 1.70% advance. The FTSE ST Mid Cap Index fell 0.30%, while the FTSE ST Small Cap Index rose 0.06%. The outperforming sectors today were represented by the FTSE ST Utilities Index, which rose 1.60%. The two biggest stocks of the Index - United Envirotech and Hyflux – ended 5.12% higher and 2.09% lower respectively. The underperforming sector was the FTSE ST Basic Materials Index, which slipped 1.82%. Midas Holdings shares declined 2.56% and Geo Energy Resources remained unchanged - It has been a testing day in the markets, with most stock markets reporting substantial losses. The spectre of another crisis in Greece as the IMF talked tough on the country adhering to its repayment schedule, a terminal outage at Bloomberg and a clampdown on OTC and short selling in China combined to test investor sentiment. The FTSE 100, fell briefly below 7000 to end up finding support at 7007; however Spain's Ibex and Italy's FTSE MIB were both 2% down while the German DAX 30 slid 1.8% and France's CAC 40 fell 1.2% - The outage impacted the UK DMO’s offer of £300m 1 month bill, due 18-May-2015(ISIN GB00BDNKWT09); the £1,000m 3-months bill due 20-Jul-2015 (ISIN GB00BDNLZ833), and the £1,500m 6-months bill due 19-Oct-2015 (ISIN GB00BDNNDG38) was conducted between midday and14.30 today. Any bids submitted in the aborted operation earlier this morning were deemed null and void - Catastrophe bond issuance is forecast to have risen almost 30% so far this year, though the size of the market remains modest. The increase in demand for cat bonds means that some bonds are now trading at a discount to their original issue price for the first time in years. Issuance for the year through to mid-April is predicted to be up 27% on 2014, at around $2.1bn, The full-year trend also looks positive, following on from a record cat bond issuance of $8.4bn in 2014 - Moody's Investors Service has described in detail the approach it takes to allocating expected credit losses across the various classes of debt issued by banks in the US, the EU and Switzerland. The liability hierarchy or "waterfall" that Moody's employs to allocate estimated losses to debt classes in these three jurisdictions incorporates the implications of key structural differences in their bank resolution and bail-in frameworks. In this way, the liability hierarchy aims to capture the prioritisation authorities will give different debt classes when apportioning losses to creditors in the event of a bank's failure. The construction of a given bank's liability structure at failure serves as the starting point of Moody's Loss Given Failure (LGF) analysis, instituted as part of its new bank rating methodology. The LGF framework is used to assess and differentiate creditor risk across banks' liability structures, as detailed in Moody's report "How Resolution Frameworks Drive Our Creditor Hierarchies." The bank resolution and bail-in frameworks in the US, EU, and Switzerland all aim to limit the use of public funds in bank resolutions while mitigating risks to financial stability. Important differences in these frameworks include the degree of power authorities have to write down or convert capital instruments, differences in depositor preference, and variations in the obligations of holding companies to their operating companies - Close Brothers has reportedly acquired advisory firm Mackay Stewart & Brown for an undisclosed amount. Andy Cumming, head of advice at Close Brothers Asset Management, said the acquisition would strengthen the national advice firm’s Scottish operation.

Blog

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

Related News

Related Articles

Related Blogs

Related Videos

Current IssueSpecial Report

Tweets by @DataLend

DataLend is a global securities finance market data provider covering 42,000+ unique securities globally with a total on-loan value of more than $1.8 trillion.

What do our tweets mean? See: http://bit.ly/18YlGjP