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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Without lax monetary and FX policies, fiscal consolidation in the euro zone is impossible

Friday, 01 June 2012 Written by 
Without lax monetary and FX policies, fiscal consolidation in the euro zone is impossible In the past, successful fiscal consolidations occurred through a combination of restrictive fiscal policy, expansionary monetary policy and sharp depreciation of the currency. In many euro-zone countries, as the policy mix is restrictive, fiscal consolidation is failing due to falling real economic activity. All possible ways to make monetary policy in the euro zone more expansionary must therefore be explored. Although there remains little leeway to lower short-term interest rates, it is possible to reduce long-term interest rates in the euro-zone countries where they are abnormally high, both by restoring fiscal credibility and through bond purchases by the ECB. Above all, the euro must be weakened, requiring interventions in the FX market. And if the current trend of restrictive fiscal policies without drastic monetary measures persists, euro-zone countries will end up in recession and with higher, not lower fiscal deficits. http://www.ftseglobalmarkets.com/

In the past, successful fiscal consolidations occurred through a combination of restrictive fiscal policy, expansionary monetary policy and sharp depreciation of the currency. In many euro-zone countries, as the policy mix is restrictive, fiscal consolidation is failing due to falling real economic activity. All possible ways to make monetary policy in the euro zone more expansionary must therefore be explored.

Although there remains little leeway to lower short-term interest rates, it is possible to reduce long-term interest rates in the euro-zone countries where they are abnormally high, both by restoring fiscal credibility and through bond purchases by the ECB. Above all, the euro must be weakened, requiring interventions in the FX market. And if the current trend of restrictive fiscal policies without drastic monetary measures persists, euro-zone countries will end up in recession and with higher, not lower fiscal deficits.

Monetary measures during fiscal consolidations in the past

In the nineties, Sweden, Canada, Finland and Italy all successfully consolidated their fiscal position through rapid reductions in fiscal deficits, without negative effects on economic growth and unemployment. This was because fiscal consolidation was systematically combined with a very expansionary monetary policy that included lower interest rates and, above all, a sharp depreciation in the exchange rate to kick things off.



In these countries, the fall in government expenditure was offset by an increase in exports linked to the devaluation of the currency as well as an increase in domestic demand linked to the fall in interest rates.

In the absence of sufficient monetary measures, the fiscal consolidations in several euro-zone countries are failing

The ECB’s policy rate is actually low, but long-term interest rates in the troubled countries have risen markedly, which results in long-term interest rates for the euro zone as a whole that are far too high.

Moreover, although it has depreciated since 2008, the euro is still overvalued against the dollar. And, since euro-zone countries want to reduce their fiscal deficits as quickly as possible, the euro zone’s policy mix is on the whole too restrictive. So it is unsurprising that activity is declining in countries with restrictive fiscal policies: Greece, Portugal, Italy, Spain, Ireland and even the Netherlands.

Indeed, the decline in growth is so substantial that fiscal deficits stopped narrowing in early 2012 in several countries (Spain, Greece, France, Italy and Portugal), requiring additional fiscal austerity measures to be adopted. But these measures will further weaken growth, especially because they are being adopted simultaneously by most of Europe (the euro zone and the United Kingdom). This could lead to an absurd situation later in the year whereby unemployment soars while the fiscal deficits fail to fall. European countries are moving increasingly to the right of the Laffer curve, where a more restrictive fiscal policy subsequently leads to a higher fiscal deficit due to a fall in economic activity.

The only solution: Expansionary monetary and exchange-rate policy

Euro-zone countries are at an impasse if the current policy mix is too restrictive, and the resulting fall in economic activity prevents them from reducing their fiscal deficits. The only solution is then to emulate the successful fiscal consolidations in the nineties by changing over to an expansionary monetary and exchange-rate policy. So – while there is no longer much to be gained from short-term interest rates in the euro zone – it is possible to reduce long-term interest rates in the countries where they are abnormally high.

In order to achieve this, these countries need to regain medium-term fiscal credibility, i.e. financial markets need to be convinced of their determination to stabilise their public debt ratios. This would enable the ECB to resume its government bond purchase programme (SMP) – aimed at accelerating the decline in interest rates – without fear of encouraging these countries to not reduce their deficits.

Furthermore, the euro must be weakened. Indeed, exchange-rate depreciation played an important role in the fiscal consolidation programmes of the nineties. And like Switzerland, China, or once again Japan, the ECB could accumulate foreign exchange reserves (in dollars in the ECB’s case) to push down the euro’s exchange rate against the dollar.

A depreciation of the euro would directly benefit the countries with large-scale industry (Germany, Italy, Ireland, Finland, Austria and Belgium) as well as countries with large-scale exports outside the euro zone (Belgium, Ireland, the Netherlands and Germany), while Spain, France, Portugal and Greece would indirectly benefit from the positive effects of the euro depreciation on these other euro-zone countries.

Averting disaster

Although resuming its government bond purchase programme and accumulating foreign exchange reserves runs counter to the ECB’s culture, if it does not do this, several euro-zone countries will soon reach the absurd situation of the simultaneous increase in both unemployment and fiscal deficits at the same time that fiscal deficit reduction policies are being carried out. Indeed, the examples from the past clearly show that successful fiscal consolidations have always been combined with expansionary monetary and exchange-rate policy.

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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