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Kiron Sarkar
November 28, 2011
Hi there,
Moody's threatens to downgrade ALL Euro zone countries - hey, that includes Germany does it not. Off course it does. I really wonder what officials in the German Finance Ministry think of that - a bit of a shock - well, possibly stronger emotions than that, I suspect.
However, why the surprise - in my view Moody's is just reflecting the reality of the situation.
French newspaper reports (La Tribune) suggest that S&P may downgrade the country's outlook to negative in the next few weeks - personally, I do not believe that France will be able to maintain it's AAA rating, so no surprise. French unemployment rose to the highest since December 2009. Looks increasingly as if Sarkozy is "French toast" in next years Presidential elections - no great loss, but the likely winner (a
socialist) - who knows what he will be up to. Basically, more uncertainty - just hope (likely) that the euro zone issues will be sorted out before that - making it more difficult for the potential Socialist candidate to complicate the process.
The far more important point is that Germany is finally recognising that it is not financially immune. The other big issue is whether Germany comes up with a credible solution re the Euro Zone and, by default (maybe not the right word to use, given the current situation) for themselves.
I am in Goa, India at present and last night had dinner with 2 delightful people with strong German connections. I was, in particular, impressed by their honesty, openness and desire to find a solution. The even better news is that a mutual friend has been promoted - good news - must travel to Berlin. Congrats Mr M. Whilst the Internet/electricity does not work in Goa, it's quite amazing what you pick up over here.
By the way, don't mention the Greeks - it's as I suspected, including the passion in the statements, when explaining the German point of view - I suspect that is a view held by many of us.
Whilst we are on the subject of the peripherals. Andy Lees of UBS (one of the best analysts around) reported that Italians were the richest (individually), certainly in Europe(probably excluding Luxembourg/Monaco). It's the Government, that is indebted - though I will continue to maintain that Italy has bumbled along with that level of debt for decades, a large part of their economy (GDP) is, how shall I put it, unrecognised (grey economy), the country has a primary surplus, and likely to have a budget surplus before other Euro Zone countries. Indeed, I have added to my 10 year Italian bonds.
Mrs M is apparently not too far off from my assessment of her, though has a sense of humour. Personally, I was told that - based on an amusing joke that Merkel shared with Cameron. Actually it was quite funny. However, I suspect that my observation that she may need more "clued up advisers" - well it did not go amiss - my interpretation though.
Had power cuts/ no Internet 4 times before 1.30pm local time (UK Market opening - so important for me) yesterday. How can India develop with such poor systems/infrastructure. The frightening issue, is that no one objects - it's par for the course they say. Indeed, it's likely to get worse, given that India is not allowing utilities to raise tariffs, even though coal prices have soared. Same issue in China - it's the old game of trying to keep down inflation/avoid politically unpopular utility price increases.
Heard that Germany is to propose more details re the EFSF by end December - whoops - how do you make a "dead duck" fly? Well politicians are hot air specialists, but even that's not good enough.
I'm now nervous, though need to check on market expectations. As far as I'm concerned, the Dutch Finance Minister said it all - basically, it close to a waste of time - my non diplomatic interpretation of his comments.
Rumours of a downgrade to France's outlook will also weigh on the EFSF.
Schaeuble apparently stated that the Euro Zone would pursue an alternative path (with the IMF), also suggesting the "dead duck" EFSF scenario. I really hope that I am wrong, but........
The ECB announced yesterday that it had bought E8.5th of Italian and Spanish bonds (most likely), still far too low. However, in total the ECB has bought E203.5th - a huge amount, but totally ineffective, given the tepid and spasmodic buying. Bond yields of the PIIGS remain at near record levels. However, they are the ECB - what else can you expect.
OK so a decent Market rally yesterday - not unexpected given that markets were grossly oversold. Too much in one day - likely. However, in spite of all the silly rumours of massive financing by the IMF for Italy - total rubbish. - E600 bn is way beyond the IMF's resources - I believe the Market is getting the sense that there will be some positive movement within the Euro Zone - personally, so do I.
US markets closed slightly off their highs - profit taking, but nothing serious. Asian markets have continued to perform today, in spite of lower Australian GDP forecasts(likely to be reduced further) and weaker employment in Japan. Likely modest positive follow through in Europe.
Importantly, the Euro is picking up - good for markets, though still around US1.3365 - though drifting at present - blast.
US economic data was marginally better -Chicago Fed, though Fitch downgraded the US outlook to negative (still AAA though). Lack of a policy to reduce debt (US15tr) was the reason cited - no great surprise. I really wonder what would happen to the US dollar, if it were not the sole global reserve currency. I suspect we all know.
I understand from a brief report, that Stephen Roach, a passionate fan of China, in spite of being a serial bear, is becoming more cautious on China - need to read his comments. Anyone got them - please forward if you do. In my view, Mr Roach is one of the most clued up people on China ( with clearly excellent high level connections), even though I have disagreed with him. His views MUST be taken into account
Can the rally last - key question.
The answer I suspect, (ex other issues), is whether by and/or at the 9th Dec EU Summit, the Euro Zone (Germany and, i suppose, France, for the time being) can finally come up with a credible plan.
Sorry, but not enough info yet, but, I'm still leaning towards giving the guys the benefit of doubt. Today's Euro Zone Finance Minister'
meeting will shed some light and an Italian bond auction will be closely watched.
Extraordinary statement for me, but I feel that Euro Zone politicians (in particular, Germans) have understood that they need to deliver and, in addition, have a greater sense of urgency.
The real problem is that I'm unsure (do you blame me) as to whether they are financially clued up enough.
However, I will, as usual, stick my neck out and suggest that it will be better than current very low expectations and therefore positive - I just hope that expectations do not rise.
Still believe in the views re the Euro Zone expressed in my last note, even though there are a number of sceptics amongst you.
Crossing my fingers that the electricity/ Internet continues to work - unlikely to do me any good though.
Best
Kiron
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