Saturday 6th February 2016
NEWS TICKER: Friday, February 5th: According to Reuters, Venezuela's central bank has begun negotiations with Deutsche Bank AG to carry out gold swaps to improve the liquidity of its foreign reserves as it faces debt payments of some $9.5bn this year. Around 64% of Venezuela's $15.4bn reserves are held in gold bars, which in this fluid market impedes the central bank's ability to mobilise hard currency for imports or debt service. We called the central bank to confirm the story, but press spokesmen would not comment - The Hong Kong Monetary Authority (HKMA) says official foreign currency reserves stood at $357bn (equivalent to seven times the currency in circulation or 48% of Hong Kong M3) as at the end of January, down compared with reserve assets of $358.8bn in December. There were no unsettled foreign exchange contracts at month end (end-December: $0.1bn) - BNP Paribas today set out plans to cut investment banking costs by 12% by 2019 to bolster profitability and reassure investors about the quality of its capital buffers. The bank is the latest in a line of leading financial institutions, including Credit Suisse, Barclays and Deutsche Bank which look to be moving away from capital intensive activities. BNP Paribas has been selling non-core assets and cutting back on operations including oil and gas financing for the last few years as it looks to achieve a target of 10% return on equity. Last year the bank announced a €900m write-down on its BNL unit in Italy, which pushed down Q4 net income down 51.7% to €665m - Johannesburg Stock Exchange (JSE)-listed tech company, Huge Group, will move its listing from the Alternative Exchange (AltX) to the JSE main board on March 1st - Moody's says it has assigned Aaa backed senior unsecured local-currency ratings to a drawdown under export credit provider Oesterreichische Kontrollbank's (OKB) (P)Aaa-rated backed senior unsecured MTN program. The outlook is negative in line with the negative outlook assigned to the Aaa ratings of the Republic of Austria, which guarantees OKB’s liabilities under the Austrian Export Financing Guarantees Act – As the first phase of talks between Greece and its creditors draws to an end, International Monetary Fund chief Christine Lagarde stressed to journalists in Greece that debt relief is as important as the reforms that creditors are demanding, notably of the pension system. "I have always said that the Greek program has to walk on two legs: one is significant reforms and one is debt relief. If the pension [system] cannot be as significantly and substantially reformed as needed, we could need more debt relief on the other side." Greece's pension system must become sustainable irrespective of any debt relief that creditors may decide to provide, Lagarde said, adding that 10% of gross domestic product into financing the pension system, compared to an average of 2.5% in the EU, is not sustainable. She called for "short-term measures that will make it sustainable in the long term,” but did not outline what those measures might be. According to Eurobank in Athens, IMF mission heads reportedly met this morning with the Minister of Labour, Social Insurance and Social Solidarity, Georgios Katrougalos, before the team is scheduled to leave Athens today. According to the local press, it appears that differences exist between the Greek government and official creditors on the planned overhaul of the social security pension system. Provided that things go as planned, the heads are reportedly expected to return by mid-February with a view to completing the review by month end, or at worst early March. In its Winter 2016 Economic Forecast published yesterday, the European Commission revised higher Greece’s GDP growth forecast for 2015 and 2016 to 0.0% and -0.7%, respectively, from -1.4% and 1.-3% previously - Fitch says that The Bank of Italy's (BoI) recent designation of three banks as 'other systemically important institutions' (O-SIIs) has no impact on its ratings of the relevant mortgage covered bond (Obbligazioni Bancarie Garantite or OBG) programmes. Last month, BoI identified UniCredit, Intesa Sanpaolo. and Banca Monte dei Paschi di Siena as Italian O-SIIs. Banco Popolare and Mediobanca have not been designated O-SIIs. This status is the equivalent of domestic systemically important bank status under EU legislation. Fitch rates two OBG programmes issued by UC and one issued by BMPS, which incorporates a one-notch Issuer Default Rating (IDR) uplift above the banks' IDRs. The uplift can be assigned if covered bonds are exempt from bail-in, as is the case with OBG programmes under Italy's resolution regime and in this instance takes account of the issuers' importance in the Italian banking sector – Meantime, according to local press reports, Italian hotel group Bauer and special opportunity fund Blue Skye Investment Group report they have completed the rescheduling and refinancing of Bauer’s €110m debt through the issue of new bonds and the sale of non-core assets, such as the farming business Aziende Agricole Bennati, whose sale has already been agreed, the Palladio Hotel & Spa and a luxury residence Villa F in Venice’s Giudecca island – Meantime, Russian coal and steel producer Mechel has also agreed a restructuring of its debt with credits after two intense years of talks. The mining company, is controlled by businessman Igor Zyuzin - Asian markets had a mixed day, coming under pressure. Dollar strengthening worries investors in Asia; from today’s trading it looks like dollar weakening does as well. Actually, that’s not the issue, the dollar has appreciated steadily over the last year as buyers anticipated Fed tightening; but it has hurt US exports and that has contributed to investor nervousness over the past few weeks, which is why everyone is hanging on today’s The nonfarm payrolls report, a bellwether of change – good or bad in the American economic outlook. Back to Asia. The Nikkei 225 ended the day at 16819.15, down 225.40 points, or 1.32%; and as the stock market fell the yen continued to strengthen. The Nikkei has shed 5.85% this week. The dollar-yen pair fell to the 116-handle, at 116.82 in afternoon trade; earlier this week, the pair was trading above 120. It is a hard lesson for the central bank, whose efforts to take the heat out of the yen by introducing negative interest rates has done nothing of the sort. Australia's ASX 200 closed down 4.15 points, or 0.08% after something of a mixed week. The index closed at 4976.20, with the financial sector taking most of the heat today, with the sector down 0.7%. In contrast, energy and materials sectors finished in positive territory, buoyed by gains in commodities. The Hang Seng Index closed at 19288.17, up 105.08 points (or 0.55%) while the Shanghai Composite was down 0.61%. down 17.07 points to 2763.95. The Shenzhen composite dropped 20.36 points (1.15%) to 1750.70, while the Kospi rose marginally by 0.08% to 1917.79. Today is the last day of trading on the Chinese exchanges for a week.

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The European Review

By Patrick Artus, chief economist at Natixis

The eurozone crisis may last 20 years

Friday, 24 August 2012 Written by 
The eurozone crisis may last 20 years Financial markets should not be complacent when considering the timeframe of the eurozone’s recovery. Indeed, there are many conditions that need to be met before the region can officially exit the crisis. For instance, a complete reindustrialisation of countries with a deficit is needed, as well as the implementation of long-term developments, including rebalancing countries’ balance sheets, eliminating fiscal deficits, ensuring structural external deficits disappear, and creating jobs to replace those lost at the beginning of the credit crisis. http://www.ftseglobalmarkets.com/

Financial markets should not be complacent when considering the timeframe of the eurozone’s recovery. Indeed, there are many conditions that need to be met before the region can officially exit the crisis.

For instance, a complete reindustrialisation of countries with a deficit is needed, as well as the implementation of long-term developments, including rebalancing countries’ balance sheets, eliminating fiscal deficits, ensuring structural external deficits disappear, and creating jobs to replace those lost at the beginning of the credit crisis.

A further option, largely rejected across the region, would be to apply elements of federalism to the region in place of wiping external deficits, where the eurozone will act as a ‘transfer union’ that allows for monetary transfers from surplus countries to deficit countries.

During the lengthy process of ensuring all of these conditions are met, there will be a risk of major and long-lasting economic, financial, social and political instability. For the financial markets, this points to a depressed level for asset prices due to the high levels of risk volatility.



The financial markets sometimes believe that the eurozone crisis will be solved rapidly

Admittedly, there has been progress – albeit rather limited – towards solving the eurozone crisis. For instance, the European Central Bank implemented Very Long-Term Refinancing Operations (VLTRO) in late 2011, and the European summit in June 2012 resulted in positive decisions for banking supervision and recapitalisation. There is promise too with the likely implementation of the European Security Mechanism.

These actions have all led to a major, although temporary, improvement in financial markets. However, financial market participants should understand that the eurozone crisis will be very long, given the developments that are needed to end it:

The long-term developments required to end the eurozone crisis

1. Rebalancing of balance sheets

In the eurozone as a whole - and especially in some countries such as Spain, Greece, Ireland, and The Netherlands - an imbalance has appeared in the balance sheets of private economic agents between liabilities (due to a very high private-sector debt ratio) and assets (due to the bursting of the real estate bubble and the fall in real estate prices).

As long as this balance sheet mismatch lasts, the private sector has to deleverage and therefore reduce its spending, which leads to sluggish growth. Also, private borrowers’ solvency will remain poor, which means that there is no end in sight for the banks’ problems. 

2. Restoration of full employment

In the aftermath of the Lehman bankruptcy in 2009, there were heavy factory job losses due to the fall in global trade. Afterwards, the bursting of the real estate bubble triggered a decline in construction employment too.

Currently, many countries (e.g. France, Italy, Spain, Greece, Ireland, and Portugal) have a very high level of unemployment. This has generated a depressive cycle, because high unemployment leads to a decline in labour's bargaining power and a fall in real wages.

The crisis will not end before economies have pulled out of this depressive cycle, i.e. when job losses have been offset by new jobs. But this process has not yet even started, and would require several measures to be adopted in order to do so. These would include attracting new activities to these countries and reindustrialising them. This is not happening, however, and is reflected in the on-going decline of industrial production capacity.

3. Elimination of fiscal deficits

The sovereign debt crisis has occurred because of excessive fiscal deficits in many countries. Governments obviously need to eliminate these fiscal deficits in order to permanently drive down long-term interest rates.

But today we can see a very worrying development: the fiscal deficits are not shrinking – on the contrary, they are increasing because of  sluggish activity.

4. If there is no federalism, the structural external deficits must disappear

Some countries (e.g. Spain, Greece, Portugal, and France) have structural external deficits because of the small size of their exporting sectors, especially in industry. This situation is not sustainable, since these countries are accumulating a continuously growing external debt, and will end up becoming insolvent.

There are then only two solutions to this unsustainable situation, both of which will take a very long time: federalism, or reindustrialisation of countries with a deficit.

We should not expect a rapid end to the crisis in the eurozone

For the time-being, we are seeing major problems when it comes to implementing these long-term developments, and federalism is still off the table.

But for the eurozone crisis to end, all of the mentioned conditions must be met.

The economic, financial, social and political uncertainty will therefore be pronounced in the eurozone for a long time to come – we would estimate about 20 years. 

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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