Friday 12th February 2016
NEWS TICKER: February 11th 2016: Gaming machine operators will be hit the hardest by the Italian government's plans to reform the gaming sector in 2016, says Moody's in a report published today. "Under the 2016 draft budget law the Italian government plans to overhaul the gaming and sports betting industries. We expect a moderate increase in taxes for gaming machine operators, which is credit negative," says Donatella Maso, a VP-Senior Analyst at Moody's. "In addition, licence renewals for betting shops and corners will result in high one-off costs, although it is unclear whether these will occur in 2016 or the following year." However, the measures under the draft budget law are not as severe as some companies and investors had expected based on the first draft of the law proposed last October - Fixed income manager BlueBay Asset Management has hired Jean-Yves Guibert and Marc Kemp into their Global Leveraged Finance team. Based in London, Guibert has joined as a senior credit analyst in High Yield from BNP Paribas, where he was head of European High Yield Sector Specialists and Marc Kemp has joined as institutional portfolio manager. Kemp was previously at JPMorgan, where he was most latterly a managing director and head of European High Yield Sales. Justin Jewell, co-head of Global Leveraged Finance Long Only says, “In normal credit cycles, the period of market stress is usually sharp but short lived and corresponds with worsening economic conditions. This cycle could be very different, as the distortions created by zero interest rate policies and quantitative easing (and their reversal) will likely result in economic and credit cycles that are less closely aligned. We would further argue that this cycle will likely show a lengthier period of spread widening, as defaults are likely to occur over a longer period.” - Marsh, a global leader in insurance broking and risk management, has appointed Sir Iain Lobban KCMG CB, former Director of the UK security and intelligence organisation GCHQ, as senior adviser on Cyber Risk. In the newly-created role, Sir Iain will provide strategic advice as Marsh works with governments, regulators and clients on how best to address the growing threat of cyber risk. He will report to Mark Weil, CEO, Marsh UK & Ireland and join Marsh’s global Cyber Centre of Excellence. Sir Iain was Director of GCHQ – the UK government’s communications headquarters– between 2008 and 2014 having previously served as director general of operations from 2004 - BNP Paribas Securities Services has won a mandate to provide Nationwide Building Society with clearing and custody services for the UK market. Nationwide Building Society is the world’s largest building society with assets of £200b, and 15 million customers across the UK. BNP Paribas Securities Services has been appointed as the settlement and gilt custody provider, safekeeping Nationwide Building Society’s £12.7bn worth of gilt assets in the UK. - The UK Debt Management Office says an additional £149.975m nominal of 3½% Treasury Gilt 2045 will be created for settlement on 12 February 2016 inrespect of the amount purchased by the Gilt-edged Market Makers and investors during the Post-Auction Option Facility, which closed at 2pm today. This additional stock will be sold at the average accepted price of £127.524 and will take the total amount outstanding of3½% Treasury Gilt 2045 to £25,315,238,000.00 nominal - The Lyxor Hedge Fund Index was down -0.9% in January. 5 out of 11 Lyxor Indices ended the month in positive territory. The Lyxor CTA Long Term Index (+2.2%), the Lyxor Global Macro Index (+0.7%), and the Lyxor Fixed Income Arbitrage Index (+0.7%) were the best performers, says the ETF major. Hedge Funds displayed esilience in January. Both markets and analysts started the year with reasonable growth expectations. These were aggressively revised down, triggered by the release of the disappointing Chinese PMI and the CNY depreciation. Strikingly, investors started to price in more serious odds for a Chinese hard landing, the growing central banks’ impotence, the risk of a US recession, and the return of global deflation. Lyxor says, in that context, CTAs thrived on their short commodities and long bond exposures. FI Arbitrage and Global Macro funds exploited monetary relative and tactical opportunities. To the exception of the L/S Equity Long Bias and Special Situations funds – hit on their beta - the other strategies managed to deliver flat to modestly negative returns - Why did investors think that the US Fed would raise rates in this jittery global market? Investors shed stocks in Asia today, on the back of what was a reasonable statement to the House of Representatives Finance Committee, that the US central bank would remain cautious on future rate hikes. According to Swissquote analysts, “Recent market turmoil and uncertainties surrounding China’s growth prospect could weigh on US growth if proven persistent. A few days ago, Stanley Fisher, Fed Vice Chairman, also delivered a cautious speech reminding us that Fed policy will remain data dependent and that it was too soon to tell whether the current market conditions will prevent the Fed from moving on with its rate cycle”. The global mood among central banks is towards an accommodative rather than tightening monetary policy: this was a theme that investors applauded last year and only last month as the ECB signalled a continuation of its policy, but it wasn’t what Wall Street wanted to hear and early gains lost out to negative sentiment and the US markets ended lower for four days in a row. The real worry of course is that ultra-loose monetary policy signals the fears of central bankers that the global economy continues to wind downwards and that consideration is fueling investor fears. Asia’s trading story has been writ in stone for the last few weeks with havens such as gold, the yen and government bonds the main beneficiaries of continued investor jitters. In commodities, Brent crude oil was down 1.3% at $30.43, while WTI crude futures fell 2.7% to $26.70, despite a drawdown in US stockpiles. Hong Kong's Hang Seng Index fell 3.9%, catching up with the week's selloff as the market reopened from a holiday. South Korea’s Kospi ended the day down 2.93%, while in Singapore the STI fell 0.77%. Japan's market and China's Shanghai Composite Index were both closed. The dollar was down 1.8% against the yen at ¥ 111.28, a sixteen-month low for the dollar against the Japanese currency. In other currencies, the euro was up 0.4% against the dollar at $1.1325, its highest since October. Spot gold in London gained 1.1% to $1218.18 a troy ounce, its highest level since May. In focus today, will likely be the Swedish Riskbank policy decision, with expectations for already negative rates to go even lower. “Markets may like cheap money for longer but they definitely don’t like the idea of a major market turn-down and another recession, hence discussion about need for US negative rates sapping risk appetite overnight. Note Janet Yellen testifying again today, although yesterday likely saw the most important information already discussed,” says Accendo Markets analysts.

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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.

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