|
Kiron Sarkar
April 18, 2012
Italy has revised its numbers. GDP this year has been reduced to -1.2%
(+0.5%, from +0.3% previously in 2013), from -0.5% previously, the
budget deficit raised to +1.7% (-0.5%, from -0.1% previously in 2013),
from +1.6%. The IMF suggests that the budget deficit will be -2.4% this
year, and that GDP will decline by -1.9% for comparison purposes.
Mr Monti essentially is having a tougher time and over optimistic views
as to his achievements will have to be tempered. Italy looks as if it is
followed Spain in ignoring the German inspired "fiscal compact". Well
what a surprise - I think not. In coming months, the German prescription
is going to be ignored - once again no surprise, it was lunacy in the
1st place and totally unachievable anyway;
The only EZ country that has met its targets is Ireland. The Irish
finance minister reported that the country would meet it's budget
deficit target this year. He admitted that growth was "a little
disappointing" YTD, though expects a pick up in the 2nd half of the
year. Apparently, the authorities are E400mn ahead in terms of revenue
collection;
The IMF suggests that 58 European banks will have to sell some US$3.8tr
of assets in the worse case scenario. The baseline forecast suggests
asset sales of US$2.6tr over the next 18 months. The relevant banks
disposed of US$580bn of assets in the 4th Q 2011 and the IMF warned that
European banks may dump 7.0% of their assets by the end of next year.
Hmmm. The fund believes that credit supply will decline by -1.7% as
banks reduce lending. They added that better policies would result in a
smaller -6.0% reduction in bank balance sheets, with a positive +0.6%
increase in growth as a result. If EZ officials failed to act, bank
balance sheets would shrink by 10%, resulting in a -1.4% fall in EZ
output and a global retrenchment in credit, as stress was transmitted to
the US financial system through the derivative markets and the fire sale
of assets. The IMF's chief economist calls for a state funded bank recap
scheme.
In addition, the IMF's Global Financial Stability Report states that
their assessment of the potential European bank deleveraging is much
larger than suggested by the European Banking Authority (the "EBA").
The EBA reported that European banks needed to raise just E115bn to
ensure that capital ratios met their 9.0% threshold. Amusingly, the IMF
reported that they had assessed a larger number of banks than the EBA
had (the EBA reviewed just 28 banks) over a longer period and, in
addition, examined the impact of market forces and funding stresses and
not just the EBA's focus on the need for additional capital. They
summarise by reporting that their report is "driven by a range of
structural and cyclical factors", whilst the EBA's exercise was merely
to increase banks capital positions. Basically, the IMF is suggesting
(in semi diplomatic terminology) that the EBA's report is a load of
.....No surprise there, the EBA's report was a load of .....Whilst the
IMF report was being circulated today, the head of the Bundesbank, Mr
"Weirdmann" stated that the EFSF/ESM funds should not be used to recap
European banks. Yes, he is the head of the Bundesbank, though I
understand that a number of you believe he should seek another position.
Forget Mr "Weirdmann", the only question I have is how long, I wonder,
will it be before the EFSF/ESM and/or the IMF resources are used for
bank recaps - very likely sometime this year in my humble view.
Importantly, the continued relative strength of the Euro could well
reflect European banks repatriating funds back home, following sales of
assets, particularly in Asia. With Asia's huge requirement for capital,
this is undoubtedly going to affect economies in the region;
Deutsche Bank reports that the worst of the crisis is yet to come. The
state that CDS's imply that 4 or more European countries may suffer
credit events. Perhaps Deutsche Bank should send the report to the
Bundesbank and to Berlin;
Persistently higher inflation calls into question whether the BoE will
undertake more QE. At present unlikely, but if the economy faces a set
back, I have no doubt that they will, irrespective of the prevailing
inflation rate;
Canadian central bank governor reported that inflation would remain near
2.0% through 2014. GDP growth was about +0.5% in the 1st Q and will be
roughly the same through the year. Global uncertainties have less of an
impact on Canada. Finally, he hinted that rates may well rise gradually
through 2014. The FT reported today that he was approached to take over
as governor of the BoE, following Mervyn Kings retirement - though the
story was denied. Mr Carney stated that he was completely focused on his
role - until.....?;
The US Environmental Protection Agency eased rules on pollution matters
in respect of fracking till 2015;
Argentina's nationalisation of Repsol's YPF unit is causing a real push
back from Europe. Spain has warned of a trade war and even the EU has
expressed concern - EU foreign minister's meet next Monday to discuss a
response. I expect the nationalisation was mainly due to domestic
politics, but this stupid ploy will backfire as investors equate
Argentina to Venezuela. Mexico's President has criticised Argentina.
Repsol was in the process of selling its shareholding to China's
Sinopec;
Outlook
European markets closed over -1.0% weaker today (ex the UK - just -0.4%
lower), though Spain closed -4.0% lower, with Italy down -2.4%.
The Spanish 10 year bond auction will be watched tomorrow. US markets
are just between -0.3% to -0.4% weaker.
The Euro has rebounded to US$1.3118, though Sterling is much stronger
(US$1.6024), given the details contained in the BoE minutes.
Spot Brent continues to decline - currently just above US$117, with the
spread to WTI declining to approximately US$15, from near US$25
recently.
Increasingly, I believe that EZ countries will back off the German
inspired "fiscal compact" ("fiscal compost" some have suggested), either
because they cant make it and/or because they they realise its a lunatic
solution, especially if civil disorder rises. Its highly important to
have fiscal constraint and reduced Government spending, but austerity
without growth does not work - plain and simple. That will put Germany
in an unenviable position, as she is consistently outvoted on the ECB
etc, etc. With a lefter leaning France possible in coming weeks (though
even a returning Sarkozy is unlikely to play ball - will not be able to
use "Merkozy" any more), the current German prescription is untenable.
It will be fascinating to see what Germany does thereafter. If they
leave the Euro (highly unlikely), the DM will become a supercharged Swissy,
making German exports uncompetitive. Jobs will be exported out of Germany
to adjust for the stronger currency. Interest rates will decline even
further though, and they will have to worry about deflation, rather than
inflation. If Germany stays in, it will have to accept higher inflation
and a lower current account surplus. That's going to be difficult to sell
to their voters. Not easy for them, I must admit.
Interesting times.
Kiron
|
