Wednesday 6th May 2015
NEWS TICKER: FRIDAY, MAY 5th: Zurich Insurance Group will release its results for the three months to March 31st this year on May 7th - According to the Luxembourg Stock Exchange, National Bank of Greece Funding Limited says that in accordance with the terms of its Series B CMS-Linked non-cumulative guaranteed preference securities (ISIN: XS0203171755) which has the benefit of a subordinated guarantee from the National Bank of Greece, the non-cumulative preferential cash dividend on the preferred securities which would otherwise have been payable on today (May 5th) will not be declared and will not be paid - Randgold Resources confirms that at the Company's Annual General Meeting held earlier today the shareholders approved a final dividend for the year ended December 31st 2014 of $0.60 per share. The dividend payment will be made on Friday May 29th to shareholders on the register as at Friday March 13th The ex-dividend date was Thursday March 12th. The exchange rate for payment to those shareholders who have elected to receive the final dividend for the year in Pounds Sterling is: £1/$1.5134. The company also announces that at its Annual General Meeting all of the resolutions were passed on a poll. Copies of all the resolutions passed have been submitted to the National Storage Mechanism and will shortly be available for inspection at www.hemscott.com/nsm.do - Intercontinental Exchange today reports April 2015 futures and options average daily volume (ADV) declined 11% compared to April 2014. Commodity ADV increased 11% led by Brent, Other Oil and Sugar contracts up 21%, 37%, and 30% respectively, from the prior April. Meantime, financials ADV declined 28% from the previous April primarily due to continued low volatility in Continental European short-term interest rate and single stock equity contracts. ADV for NYSE’s US cash equities increased 3%, while US equity options ADV declined 30% from the prior April. NYSE’s U.S. cash equities market share was 23.8% and NYSE’s U.S. options market share was 18.4% - McDonald’s Corporation’s new chief executive today laid out initial plans for luring back customers, boosting sales and transforming the world’s biggest restaurant chain by revenue into a “modern, progressive burger company.” The plans include organising McDonald’s business around four new operating divisions, selling restaurants to franchisees, cutting corporate costs, improving food quality and taking layers out of its “cumbersome” management structure - The Central Electricity Authority (CEA) is reported to be planning an exhaustive basin-wise study of the hydropower potential in the country after a gap of 28 years. The study will also assess the environmental and social impact of river basin development. The last survey was undertaken between 1978 and 1987. The plans come against a backdrop of widespread protests against hydropower projects in India from people who are at risk of being displaced by the projects. Most of India’s hydropower potential falls in seismic zone 5, they charge, a region classified as highly vulnerable to high-intensity quakes. The exercise will also consider issues such as site geology, submergence and impact on environment and forests - Optical network infrastructure specialist has announced it has entered a definitive agreement to acquire Cyan Inc, a rival optical provider and software platform specialist. The agreement puts an approximate $400m on Cyan; no other terms have been released yet - Spain’s Cirsa Funding Luxembourg SA has announced the results of its tender offer to repurchase for cash up to €450,000,000 aggregate principal amount of its outstanding 8.75% senior notes due 2018. Deutsche Bank, London Branch is acting as tender agent and dealer manager - Trading turnover since the start of 2015 touched CHF534.3bn (+33.1% versus the same period in the prior year of 2014), while the number of trades since the start of 2015: 18,297,635 (+39.9% versus the prior year period) and average trading turnover per day was valued at CHF6.5bn over the first four months of this year says SIX Swill Exchange and SIX Structured Products Exchange - CME Clearing says it is aware that PAI was not included in the end-of-day (EOD) reporting or cash movements from Monday 5/4 for CDS in Production. IRS was not affected says the CCP. To correct, CME Clearing will enter cash adjustments tonight for each open position and will contact each firm with their expected adjustment figures. The CCP also apologies for the inconvenience caused – The Federal Reserve Bank of New York says its daily effective Fed Funds rate is 0.13% (Low 0.060% and High ).3125%) with four basis points of standard deviation - UK operator O2 has acquired the interest held in mobile commerce outfit Weve from its joint venture partners EE and Vodafone. Weve will now operate as a wholly owned subsidiary of O2 UK -

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The European Review

By Patrick Artus, chief economist at Natixis

The Calculation for Spain

Tuesday, 31 July 2012 Written by 
The Calculation for Spain To alleviate its debt and escape its state of crisis, we think Spain has two strategies to choose from. The first one, already in place since 2009, involves a reduction in the fiscal and external deficits while accepting aid from other eurozone countries. If Spain were to continue with this strategy, it would need to incorporate regular debt purchases by the ECB and possibly the ESM, and provide assistance to recapitalise its banks. The second strategy would be to leave the euro, which would mean a default on its gross external debt and a sharp devaluation of its currency. Both of these strategies contain negatives that need to be considered: the question is, which one would be the least detrimental to the country’s economic future? http://www.ftseglobalmarkets.com/

To alleviate its debt and escape its state of crisis, we think Spain has two strategies to choose from. The first one, already in place since 2009, involves a reduction in the fiscal and external deficits while accepting aid from other eurozone countries. If Spain were to continue with this strategy, it would need to incorporate regular debt purchases by the ECB and possibly the ESM, and provide assistance to recapitalise its banks.

The second strategy would be to leave the euro, which would mean a default on its gross external debt and a sharp devaluation of its currency.

Both of these strategies contain negatives that need to be considered: the question is, which one would be the least detrimental to the country’s economic future?

Strategy One: Spain's present strategy of adjustment...A Catch-22 situation?

Spain’s high levels of external debt mean it cannot increase its external borrowing (except for emergency borrowing from the EU or the ECB). Therefore, it must balance its current account.



Its present strategy of adjustment is clear: a restrictive fiscal policy; an improvement in cost-competitiveness to rebalance foreign trade; and the acceptance of European aid to recapitalise banks in distress. The last action hinges on purchases of government bonds to push down long-term interest rates. However, this strategy is risky.

A scenario may help us better understand this strategy: a fall in real wages due to price-stickiness discourages household demand, which has a knock-on effect to make business investment decline. Hence, there is a major decline in domestic demand and activity, making it very difficult to reduce fiscal deficit. In early 2012 we saw this in action when Spain’s fiscal deficit widened considerably, due both to tax revenue short-falls and higher-than-expected government spending. A continuation of this strategy therefore may lead to a further increase in unemployment and a decline in activity.

There could also be a reduction in the external deficit due to the decline in purchasing power. That said, imports would have to be reduced by a further 20% for Spain's current account deficit to disappear, which would mean a decline of at least 12% in domestic demand and real income.

The only hope for this strategy is that improvements in cost-competitiveness could increase Spain's exports and market share, and improved profits could eventually increase business investment.

Strategy Two: Exit from the euro, default and devaluation...A possible solution or suicide?

The other strategy would be for Spain to leave the euro, sharply devalue its currency, and inevitably default on its gross external public and private debt. This would obviously be a big problem for Spanish multinational companies, given the size of debt and the impossibility of servicing it following devaluation.

But what would the likely consequences of this strategy be?

For a start, it requires an immediate rebalancing of foreign trade. The country could no longer borrow, which would result in a much weaker economic situation in the short term.

Our econometric estimate shows elasticity to the real exchange rate of 0.73 for Spain's exports and 0 for imports, in volume terms. If we assume 30% devaluation, the foreign trade gain in volume terms would be 7.7 percentage points of GDP, which is very substantial.

Devaluation would increase the price of imports and therefore reduce real income by about 5.9 percentage points, which would leave a net gain of approximately 2 percentage points of GDP.

When the Spanish peseta was devalued in the early 1990s (twice in 1992, once in 1993), the current account deficit disappeared in 18 months, exports accelerated strongly, while domestic inflation reacted only slightly to the rise in import prices. The decline in GDP only lasted one year, and from that point growth was strong because of falling interest rates.

In today’s instance, devaluation would also increase the competitiveness of tourism and increase the surplus for these services in local currency, though perhaps not in foreign currencies such as the euro.

As financing becomes completely domestic, it is not impossible that there could be a reduction in the sovereign risk premium.

Devaluation could subsequently attract direct investment by businesses. With 30% devaluation, for example, labour costs in Spain would fall to EUR 14 per hour, 60% less than in Germany. However, since the size of Spanish industry is relatively small, new activities need to be considered for it to generate a large surplus.

Conclusion: What strategy to choose for Spain?

If the improvement in Spain's cost-competitiveness and profitability does not produce quick results, the present strategy will fail: wages would have to be reduced on a greater scale to eliminate the external deficit, and the fiscal deficit would remain very high.

The other strategy (leaving the euro, devaluation and default) could be successful if the devaluation attracted new activities, but it involves a lot of uncertainties – such as the impacts on Spanish multinationals, interest rates and foreign trade.

As stated earlier, both strategies are rather bleak, but positive aspects are still evident. Considering all of the factors, we believe that the strategy of devaluation and default could be the most efficient, particularly due to the high price elasticity of exports and the fact that Spain's entire current account deficit is accounted for by the interest on its external debt. As in 1992, it could also be effective due to the domestic financing of fiscal deficits, which will prevent a rise in interest rates.

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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