Friday 28th November 2014
NEWS TICKER: FRIDAY, NOVEMBER 28TH 2014: The Straits Times Index (STI) ended -8.70 points lower or -0.26% to 3340.96, taking the year-to-date performance to +5.56%. The FTSE ST Mid Cap Index declined -0.11% while the FTSE ST Small Cap Index declined -0.43%. The top active stocks were SingTel (-0.26%), DBS (-0.25%), ThaiBev (-4.38%), Suntec REIT (+0.26%) and OCBC Bank (+0.10%). The outperforming sectors today were represented by the FTSE ST Health Care Index (+0.47%). The two biggest stocks of the FTSE ST Health Care Index are Raffles Medical Group (-0.52%) and Biosensors International Group (+2.75%). The underperforming sector was the FTSE ST Basic Materials Index, which declined -2.14% with Midas Holdings ’ share price declining -5.09% and Geo Energy Resources’ share price gaining +2.33%. The three most active Exchange Traded Funds (ETFs) by value today were the IS MSCI India (+0.26%), United SSE 50 China ETF (-0.57%), STI ETF (+0.59%). The three most active Real Estate Investment Trusts (REITs) by value were Suntec REIT (+0.26%), Ascendas REIT (-0.86%), CapitaCom Trust (-0.89%). The most active index warrants by value today were HSI24400MBeCW141230 (-15.73%), HSI23800MBePW150129 (+6.45%), HSI23600MBePW141230 (+11.11%). The most active stock warrants by value today were DBS MB eCW150602 (+3.33%), UOB MB eCW150415 (+5.23%), UOB MB eCW150102 (+2.38%) - Moody's has withdrawn the rating of Rossiyskiy Kredit Bank's Caa3 long-term local- and foreign-currency deposit ratings, the Not Prime short-term deposit ratings and the E standalone bank financial strength rating (BFSR), equivalent to a caa3 baseline credit assessment. The ratings agency says the rating has been withdrawn for its own business reasons At the time of the withdrawal, the outlook on the bank's long-term ratings was negative while the standalone E BFSR carried a stable outlook - Malaysian builder MMC Corp Bhd said earlier today that it will list its power unit Malakoff Bhd (IPO-MALB.KL) in a deal bankers expect to raise more than $1bn dollars. The IPO, for up to 30.4% of Malakoff's capital, was deferred earlier this year and approval from the Securities Commission lapsed as a result. MMC, controlled by reclusive Malaysian tycoon Syed Mokhtar Al-Bukhary, will resubmit the application within one month and expects the deal to be completed by second quarter of 2015, according to a local stock exchange filing – According to local press report the newly minted Somalia Stock Exchange expects seven companies in the telecoms, financial services and transport sectors to list when it is set up in 2015. Somalia's economy is slowly recovering from more than two decades of conflict, although the government is still battling an Islamist insurgency. Amid the chaos, some businesses have thrived, including money transfer and mobile phone firms. The Somalia Stock Exchange has opened administrative offices in Mogadishu and other Somali centres like Kismayu, as well as in Nairobi, to help recruitment and in other related issues - Moody's has upgraded to Baa1 from Baa2 the long-term deposit ratings of China CITIC Bank International Limited, and affirmed the bank's P-2 short-term deposit ratings. The bank's senior unsecured MTN program rating and deposit note/CD program ratings are also upgraded to (P)Baa1/Baa1 from (P)Baa2/Baa2, while the short-term deposit note/CD program ratings are affirmed at (P)P-2. The bank's baseline credit assessment (BCA) is unchanged at baa3. The outlook on all the ratings is stable. The rating action concludes Moody's review for upgrade for China CITIC Bank International, which was initiated on September 2nd this year, after the senior unsecured bond rating of its ultimate parents CITIC Group Corporation and CITIC Limited (formerly CITIC Pacific Limited) were upgraded to A3 from Baa2. CITIC Group Corporation, wholly owned by China's Ministry of Finance, owns 78% of CITIC Limited, which in turn owns 67% of China CITIC Bank.

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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