Tuesday 7th July 2015
NEWS TICKER: MONDAY, JULY 6TH: Moody's Interfax Rating Agency (MIRA), which specialises in credit risk analysis in Russia, has withdrawn the Baa1.ru national scale rating of Petrocommerce Bank (OJSC) based in Russia (Ba1 negative). This action follows Petrocommerce Bank's reorganisation and merger with Bank Otkritie Financial Corporation PJSC (deposits/senior unsecured Ba3 negative, BCA b1). Moody's Interfax Rating Agency's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks, report Moody’s. NSRs differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".ru" for Russia. - PEGAS, the pan-European gas trading platform operated by Powernext, today announced that a total volume of 68.9 TWh were traded in June 2015. This represents a year on year increase of 41% (June 2014: 48.8 TWhPEGAS, the pan-European gas trading platform operated by Powernext, today announced that a total volume of 68.9 TWh were traded in June 2015. This represents a year on year increase of 41% (June 2014: 48.8 TWh).Overall spot trading volumes amounted to 28.4 TWh which represents a year on year increase of 31%. PEGAS recorded volume increases in particular in the German, French and Dutch market areas. The June volume in the German GASPOOL and NCG areas increased to 12.0 TWh (+33%), including 3.6 TWh traded in quality-specific gas products. The volume in the French PEG Nord and TRS market area rose to 8.0 TWh (+40%). The Dutch TTF spot volume reached 8.1 TWh (+17%) while the Belgian ZTP spot market registered a volume of 222,715 MWh. The total volume of spread transactions amounted to 2.3 TWh. - Clearstream has issued an update to the Statement of Holdings report (MT535), covering both HTML and CSV formats: effective immediately the newly added column, “Pledged for Collateral” for non-available positions (introduced as part of the June release) will be renamed "Pledged for Collateral NAVL". This change applies to the Statement of Holdings report (MT535) in HTML format and when downloaded as a CSV file. Other reporting formats are not impacted, says Clearstream. In addition, when downloaded as an MT535 CSV file, the newly named column "Pledged for Collateral NAVL" will now appear as the final column. This allows a better reconciliation of positions, says Clearstream Banking - Christine Lagarde, managing director of the International Monetary Fund (IMF), made the following statement today: "The IMF has taken note of yesterday’s referendum held in Greece. We are monitoring the situation closely and stand ready to assist Greece if requested to do so.” - Morgan Lewis is enhancing its United Kingdom and global employment law capabilities with the addition of employment investigations and data privacy partner Pulina Whitaker, who joins the firm today from another global law firm. Her arrival, says the firm, strengthens the full suite of global client services offered from the Morgan Lewis London office, including those connected to finance, corporate, energy, funds, and litigation - Leading shares in European bourses will continue to struggle today as investors look for direction from European leaders over their response to the Greek referendum decision yesterday. In Asia, Japan’s Nikkei retreated -2.08% while Hong Kong’s Hang Seng went down by 4% and the Shenzhen Composite down by 4.69%. The Shanghai Composite stabilised around 3,709, up 0.61%, as China Security Finance Corp, the institution which managed short selling and margin trading, will receive a capital boost to 76bn “to maintain financial market stability and expand its business".; it is actually something of a turnaround, as Chinese equities have been under pressure for over a month now. In Australia, equity markets are trading into negative territory with the S&P/ASX down -1.14% while AUD/USD broke to the downside the strong support lying at 0.7533 (low from April 2) and is heading toward the following one at 0.7414 (low from October 2010). Tomorrow, the Reserve Bank of Australia will release its interest rate decision. The US dollar is broadly higher against G10 as only the Japanese yen is adding gains versus USD. German Chancellor Angela Merkel will meet French president François Hollande later today. Greece’s main creditors have more pressures on their shoulders; analysts suggest that they will be more willing to provide significant debt relief measures. The next payment is due to the ECB on July 20th.

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The European Review

By Patrick Artus, chief economist at Natixis

What kind of economy would the euro zone be without Germany?

Thursday, 28 June 2012 Written by 
What kind of economy would the euro zone be without Germany? There is increasing talk about establishing federalist mechanisms (eurobonds, eurobills) and pooling certain risks and investments between euro-zone countries (European bank guarantees, recapitalisation of banks by the EFSF-ESM, increased investments by the EIB, EFSF-ESM access to ECB funding, purchases of government bonds by the ECB). Germany's criticism of these proposals is that they ultimately place all the costs and all the risks on Germany, due to its economic, fiscal and financial situation and its credibility in financial markets. It is claimed that eventually all the bills will be sent to Germany, since the other euro area countries have no fiscal or financial leeway or any credibility to guarantee deposits and loans. We shall therefore examine the economy of the euro zone excluding Germany and ask the question: Is it in such a bad situation that federalism or the pooling of risks and investments between euro-zone countries would in fact amount to potentially placing the entire burden on Germany? We think that Germany’s fears are justified. http://www.ftseglobalmarkets.com/

There is increasing talk about establishing federalist mechanisms (eurobonds, eurobills) and pooling certain risks and investments between euro-zone countries (European bank guarantees, recapitalisation of banks by the EFSF-ESM, increased investments by the EIB, EFSF-ESM access to ECB funding, purchases of government bonds by the ECB). Germany's criticism of these proposals is that they ultimately place all the costs and all the risks on Germany, due to its economic, fiscal and financial situation and its credibility in financial markets. It is claimed that eventually all the bills will be sent to Germany, since the other euro area countries have no fiscal or financial leeway or any credibility to guarantee deposits and loans.

We shall therefore examine the economy of the euro zone excluding Germany and ask the question: Is it in such a bad situation that federalism or the pooling of risks and investments between euro-zone countries would in fact amount to potentially placing the entire burden on Germany?

We think that Germany’s fears are justified.

Federalism: pooling between euro-zone countries

The resolution of the euro-zone crisis will inevitably involve establishing certain forms of federalism (eurobonds, eurobills) and the pooling of certain investments and risks (a European bank guarantee system, the recapitalisation of the banks (e.g. Spanish banks) by the EFSF-ESM, an increase in structural funds or investments by the EIB, ESM access to ECB funding).



The pooling of risks between euro-zone countries already exists: the Target 2 accounts are a pooling of bank risks among euro-zone central banks, and purchases of government bonds by the ECB pool sovereign risk.

This trend to federalism and pooling is inevitable: in a monetary union without federalism, countries with external surpluses and countries with external deficits cannot coexist permanently due to the resulting accumulation of external debt.

A number of financing needs are too substantial to be borne by a single country, e.g. for Spain the need for recapitalisation of its banks. And a number of risks (e.g. the risk of a bank run) are also too great not to be pooled.

Is this move towards federalism and pooling a trap for Germany?

The view in Germany is clearly that this move towards federalism and pooling is a trap for Germany. It is claimed that Germany will have to cover most of the costs because it has public finances in good health, growth that is now stronger, higher living standards than the countries in distress, and excess savings.

Germany also has strong credibility in financial markets, as shown by its interest rate level, and it is the only country to be able to credibly insure risks and guarantee loans.

The Germans' concern is therefore understandable: if there is federalism and a pooling of investments and risks, will Germany "receive all the bills"?

To determine whether this is a real risk, let’s examine the situation of the euro zone without Germany: is it such a worrying region, will it have to be propped up permanently by Germany?

The economic and financial situation of the euro zone without Germany: Is it serious?

Without going into greater detail for each country, we shall examine:

·                   its competitiveness, the foreign trade situation; the weight of industry;

·                   its situation regarding its technological level, skills, productivity and investment; its potential growth;

·                   the situation of its businesses and households;

·                   its public finances.

1. Foreign trade, competitiveness, weight of industry

The euro zone without Germany has:

·                   a structural external deficit;

·                   a shortfall in competitiveness;

·                   a small industrial base;

·                   a large external debt.

2. Technological level, skills, investment, productivity and potential growth, capacity for job creation

The technological level of the euro zone without Germany is fairly low, as is the population's level of education; this zone invests little, has low productivity gains, and since 2008 it has destroyed jobs massively.

3. Situation of businesses and households

Corporate profitability in the euro zone excluding Germany is low, but private (corporate and household) debt is lower than in Germany; however, household solvency has deteriorated (in Germany, household defaults are low and stable; in France, Spain and Italy, they are high and rising).

4. Public finance situation

The public finances of the euro zone excluding Germany are in a very poor state compared with Germany. Indeed Germany’s debt to GDP ratio is expected to fall, while in the euro zone excluding Germany it should rise rapidly toward 100%; Germany has a 1% primary surplus, while the euro zone excluding Germany has a 2% primary deficit.

Conclusion: Are the German fears justified?

If the euro zone were to become a federal monetary union, with solidarity between countries and pooling of certain investments (recapitalisation of banks, for example) and risks, surely the rest of the euro zone excluding Germany could only be:

·                   benefiting from transfers from Germany;

·                   benefiting from Germany's credibility in the markets;

·                   benefiting from Germany's guarantee;

Or could it share this burden with Germany? We suspect that the burden on Germany would be very heavy.

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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