Monday 25th July 2016
NEWS TICKER: JULY 25TH 2016: Moody's says that Vedanta Ltd's (unrated) revised merger terms with Cairn India Ltd. (unrated) have no immediate impact on Vedanta Resources plc's B2 corporate family rating (CFR), Caa1 senior unsecured notes rating and negative outlook. While the revised terms entail a rise in debt/cash out flow of an estimated $447m -- compared to $120munder the original terms -- they will give Vedanta Ltd. complete access to Cairn India's large cash holdings, as well as provide the flexibility to reduce debt, thereby lowering leverage and reducing subordination within the group. As such, the successful execution of the merger, to the extent that it leads to de-leveraging, will be credit positive. Positive rating implications could emerge if adjusted leverage improved to less than 4.5x on a sustained basis. Should the merger proceed as announced -- subject to approval, in some cashless, all-stock transaction -- minority shareholders will receive one equity share and four 7.5% preference shares in Vedanta Ltd. for every share held in Cairn India. Shareholders will have the option of redeeming the preference shares within 30 days, or holding until maturity for 18 months. Following completion of the transaction, Vedanta Resources' shareholding in its subsidiary Vedanta Ltd will fall to 50.1% from 62.9%. At the end of June this year, Cairn India had $3.5 billion in cash and no external debt outstanding." Although delayed from the initial announcement in June 2015, the revised terms are a step forward in the merger proceedings -- the merger will provide Vedanta Ltd. better access to Cairn India's large cash balances of $3.5 billion, as previous access was only possible through the up-streaming of dividends," says Kaustubh Chaubal a Moody's Vice President and Senior Analyst. - The World Bank is beginning work on a new project, aimed at supporting the poorer regions of Poland by better utilising European Union funds made available to the country through the European Union Financial Framework 2014-2020. Representatives from Podkarpackie and Świętokrzyskie, the two regions selected for this work, will cooperate with experts from the World Bank, the Ministry of Development, and the European Commission during this project. The project - part of a European Commission initiative - will also include two regions in Romania. Poland and Romania are the first to implement this pilot project, whose objective is to increase the absorption of European Union funds and support socioeconomic development at the local level. “We are happy that we will be able to use our global experience, as well as our knowledge of the conditions in Poland, to support the Polish authorities in developing the country’s lagging regions,” says Arup Banerji, World Bank regional director for European Union countries - The Straits Times Index (STI) ended 4.87 points or 0.17% higher to 2945.35, taking the year-to-date performance to +2.17%. The top active stocks today were Singtel, which gained 1.66%, DBS, which declined 0.06%, Wilmar Intl, which declined 0.97%, UOB, which gained0.26% and ComfortDelGro, with a1.73% fall. The FTSE ST Mid Cap Index declined 0.84%, while the FTSE ST Small Cap Index declined0.24%. Elsewhere in Asia, Taiwan stocks retreat from over 1-year high; TSMC down. Taiwan stocks retreated from more-than-one-year highs on Monday as investors took profits on recent winners such as Taiwan Semiconductor Manufacturing Co (TSMC). The main index fell 0.6 percent at 8,954.58 points. It reached as high as 9,085.91 earlier in the session, an intraday level not seen since July 2015. The electronics subindex and the financial sub-index were both down about 0.7%. TSMC, the world's top contract chip maker, was off nearly 1%. The yen traded weaker with trade data showing better than expected figures though exports and imports declined notably ahead of a week that will see the Fed and the Bank of Japan comment on monetary policy. The adjusted trade balance came in at a surplus of ¥33bn while and imports eased 18.8%, less than the 19.7% drop expected and exports fell 7.4%, less than the 11.6% decline anticipated. The overall trade balance came in at a surplus of ¥693bn, better than the ¥495bn expected. USD/JPY changed hands at 106.32, up 0.18%, while AUD/USD traded at 0.7478, up 0.17%. GBP/USD traded at 1.3135, up 0.19%. -- Rangold Resources will be announcing its Q2 results at the London Stock Exchange on Thursday, August 4th – Most equity markets kicked off higher today, buoyed by the firm tone of the G-20 Finance Ministers meeting which promised “to use all policy tools –monetary, fiscal and structural- individually and collectively” to achieve the goal of “sustainable, balanced and inclusive growth” in view of lingering concerns over spillover effects from Brexit. Central bank meetings will be the focus of market attention this week. The Fed is widely expected to leave its monetary policy unchanged this week. However, a recent string of better than expected U.S. data reignited speculation that the Federal Reserve will raise interest rates before the end of the year. Interest rate futures are currently pricing in a 45% chance of a rate hike by December, compared with less than 20% a week ago and up from 9% at the start of this month. The Fed monetary oversight committee starts its two-day meeting tomorrow. However, the story this week will focus on the Bank of Japan: will it, won’t it expand its monetary policy, without ‘helicopter money’? According to Russell Matthews, a portfolio manager at Russell Matthews, “Core government bond markets have largely moved sideways and very short dated US rates have repriced the probability of a Federal Reserve interest rate hike in 2016 meaningfully higher. Corporate bonds have continued to perform well as the insatiable demand for yield is unabated, with spreads compressing in all sectors… Rate and sovereign credit have had a good run of late but the question we are asking ourselves is are we at the point where policy makers and investors have become complacent? Our mantra has always been that policy makers are likely to be lazy and under deliver if there is no pressure from markets. We have been through two major risk events in the last six weeks (Brexit, Turkey) and risk assets have continued to perform. We expected and anticipated this outcome, but that does not prevent us from becoming uneasy at the level of calm that we are witnessing, and the growing confidence that the market has with policy makers.” The other trend on investors’ minds will be the EU’s stance on Italy’s growing banking crisis: will the EU stick its ostrich like head in the sand? Elsewhere in Europe, Greek Minister of Finance Euclid Tsakalotos stated in an interview on Saturday that the primary surplus targets until 2018 are attainable and the government will not have to activate the automatic spending cuts mechanism. Beyond 2018 and in the medium term, however, the Greek government will pursue through negotiations primary surplus targets below 3.5% of GDP -

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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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