Archive | November, 2011

Public sector strikes following George Osborne’s announcement

30 Nov

There is unrest in the UK today as public sector unions join in a one-day national strike, following announcements made by George Osborne saying restraints on public sector pay will be extended for another two years.

Mr Osborne, Britain’s chancellor of the exchequer, attributed the changes to the turmoil in the eurozone having a damaging effect on the UK economy. He said: “Our challenge is even greater than we thought because the boom was bigger, the bust was even greater and the effects will last even longer”.

The Office for Budget Responsibility estimated a fall in economic growth from 1.7 to 0.9 per cent this year, and below half of the 2.5 per cent estimated for next year.

Whilst economic growth falls, the debt-to-GDP ratio is forecast to increase.

The OBR predicted the country would have to borrow thirty three billion pounds more than forecast. However, the Labour Party’s finance spokesman Ed Balls thinks Mr Osborne would have to borrow an additional one hundred and fifty eight billion.

He described Mr Osbourne’s borrowing as a “miracle cure”, and suggested the government should adopt Keynesian economics. This would mean intervention in the form of government spending and tax breaks in order to stimulate the economy.

Mr Osborne stated that Britain has faced higher inflation, and Keynsian thinking seeks to kurb that inflation.

But Mr Osborne is adamant a reduction in public sector pay increases by 1per cent is what the government needs to meet financial targets.

France defends credit-rating following Moody’s warning

22 Nov

France have been brought into the firing line this week as ratings agency Moody’s have given a warning it may change its ‘stable outlook’ on its credit rating to ‘negative’. This would mean it would be downgraded from its current ‘triple A’ status.

In response, French finance minister Francois Baroin said their current rates “correspond to financing conditions that are very favorable.” France aim to do everything in their power to not get downgraded.

In Moody’s weekly credit outlook note, Alexander Kockerbeck outlined the firms reasoning behind its recent warning:
“Elevated borrowing costs persisting for an extended period would amplify the fiscal challenges the French government faces amid a deteriorating growth outlook, with negative credit implications.”

France’s 10-year-bonds rose to 3.7 per cent last week. Whilst this doesn’t come near to the levels paid by Italy and Spain, the difference between French bonds and German Bunds reached a euro record high.

France are paying nearly twice as much as Germany for its long-term funding. Rising borrowing costs are what pushed countries such as Ireland and Portugal to seek bailouts.

Christophe Nijdam, a bank analyst at Alphavalue in Paris, thinks France is the weakest of the triple A’s. He said: “In my opinion, the only thing that can stop all of this lies in Germany.”

Another of Moody’s fears is weaker growth prospects in France. However, the French government remain confident they have 6 billion euros to fall back on, if they face lower growth next year.

Christophe Nijdam, a bank analyst at Alphavalue in Paris, thinks France is the weakest of the triple A’s. He said:

Euro turmoil could cause havoc on U.S. exports

11 Nov

Experts fear Europe’s debt crisis could take a bite out of U.S. exports, despite a record 180.4billion dollars sold by companies in foreign sales seen in September.

The Commerce Department credited rises in industrial supplies and consumer goods, such as clothes and toys, in the month retailers start preparing for the holiday season.

However, economists think the current level of exports is unsustainable amidst the turbulent times in Europe.

Paul Dales, an economist with Capital Economics, said: “I just can’t really see exports continuing to perform as well as they have done. It’s pretty clear that things aren’t going well from a trade point of view, and that the slowdown in the euro zone is starting to have an effect in the U.S.”

President Obama put emphasis on U.S. companies exporting to Asia as a solution. However, it is feared the debt problems in Europe could have a “knock on effect” in emerging markets such as China, Europe’s largest trading partner.

Menzie Chinn, economics professor at the University of Wisconsin, said: “If you have a big financial conflagration, that has repercussions that are extremely hard to predict.”

China is very important to American companies; the U.S. Exports 100 billion dollars worth of goods and services to China each year, making it their third largest export market.

Sales with the Chinese market result in jobs being created in American. Jobless claims reached a seven month low in the third quarter, which showed signs of the U.S economy on the road to recovery. If China are heavily affected by Europe’s debt crisis, the gradual economic recovery in the U.S. could be hurt.

Berlusconi set to leave… Italian debt set to stay

10 Nov

Another day, another record of high cost borrowing. Yields on Italian bonds were 7per cent, a level seen as unsustainable.

Only this time a possible bailout for Italy poses as a much larger threat than those for Portugal, Ireland and Greece. With Italy’s size, it has been deemed “Too big to bail” according to many investors. Fredrick Newman from HSBC in Hong Kong said, “Europe has moved from a manageable crisis in Greece to a much bigger challenge in Italy.”

Italy has a slow growth rate, which means it would be virtually impossible to pay back what it owes over ten years with an interest of 7per cent. This could raise the prospect of an uncontrolled default by the country, meaning global financial markets would be undoubtedly hit hard.

What’s more, the fear of contagion has been causing unease in the market. Rebecca Patterson, chief market strategist at J.P. Morgan Asset Management, said: “Contagion is alive and well.” She said Italy could pose as a “systemetic risk” to global economy, accounting for 20 per cent of the GDP of the eurozone.

James Mackintosh, investment editor for the Financial Times, said Italy “could live with higher borrowing costs for at least a year, although it wouldn’t be terribly comfortable for Rome… The real problem is investor psychology.”

Even if investors wanted to buy Italian bonds, they would see how others found it unattractive, meaning they are likely to steer clear.

Amidst the panic, the confusion over early elections in Italy have been making the headlines. Traders responded well to Mr Berlusconi’s planned departure, which saw a positive effect on financial markets. But a disagreement between Mr Berlusconi and Italian President, Giorgio Napolitano has sparked fears over whether the country will hold early elections next year.

Under Mr Berlusconi’s rule, the country has seen unemployment rates amongst young people reach a shocking 30per cent. It is hardly surprising the country craves new leadership in such turbulent times.

Mr Napolitano aimed to dispel the rumors last night, insisting that Mr Berlusconi will leave “within days.”

Mr Mackintosh said, “It’s true that Italy needs to dump Mr Berlusconi and reform its economy. It needs to do both pretty urgently. It will need to be financed in the mean time.”

All signs lead to the ECB. John Stopford, head of fixed income at Investec suggested if the ECB did not step in it could mean a break-up of the euro.

But with a potential rescue cost of as much as 1,000billion euro, the euro debt crisis fund could reach breaking point. Italy needs to issue 340billion euro in new debt in 2012, but the eurozone bailout fund only has about 300billion euro left over after the bailouts of Greece, Ireland and Portugal.

Euro rescue fund raises 3billion euro

9 Nov

The European Financial Stability Facility have raised 3billion euros in a bond sale on Monday, despite fears from many investors who have showed hostility towards eurozone bonds.

The sale was expected to go ahead last week, but it had to be postponed due to turmoil in the markets, and the EFSF expected to hold the sale in the ‘near future’. This week finance ministers were seen speeding up the process. However, The Financial Times suggest the volatile markets are drawing bankers away.

Yet EFSF head Klaus Regling was eager to assert: “I am pleased that the EFSF has attracted investors from all over the world with a satisfactory overall amount despite a difficult market environment”.

The EFSF named the three banks who will be joint managers for the 10-year deal; Barclays Capital, Credit Agricole and JP Morgan.

The Financial Times reports how one banker sees the EFSF bond sale favorably, “The EFSF wanted to show that it can price in any market and for that reason I would say this is a successful deal”.

The ten-year bond has been priced at 177 basis points – over triple the interest of the deal issued in June, and standing as the highest rate so far. Yet some bankers have said the two cannot be compared, as the situation has changed making it difficult for borrowers, including the EFSF.

Possible nuclear weapons developed in Iran

9 Nov

The battle is between Iran’s capital Tehran and the west. The war tactics may include nuclear weapons and a surprise attack from Israel. And the prize remains the same. Oil at an affordable price.
Whilst the increase in price by the barrel has caused unrest amongst traders, it is the possibility of the development of nuclear weapons in Iran that has sparked headlines today.

The UN’s International Atomic Energy Agency have been gaining evidence over the past eight years to suggest Iran have carried out “work on the development of an indigenous design of a nuclear weapon including the testing of components”.

This has led Ehud Barak, Israeli’s defense minister, to warn in a local radio interview, “we are probably at the last opportunity for co-ordinated, international, lethal sanctions that force Iran to stop.”

But Tehran are unlikely to cower in the trenches. As the world’s third-largest oil exporter, Iran can afford to increase oil by the barrel. What’s more, the BBC have reported Iran’s envoy to the IAEA Asghar Soltanieh actively condemned the claims of the development of a nuclear weapon, describing the report as “unbalanced, unprofessional and prepared with political motivation and under political pressure by mostly the United States”.

Yet it is clear from some market participants reactions in a survey they are predicting a significant price rise by the barrel. The survey, ran by The Rapidan Group in Washington, showed some stating there could be an increase of 175 dollars, to a high total of 290 dollars a barrel. Currently, the Financial Times reported the price has rallied to almost 115 dollars.

Even more worrying, Iran could retaliate by closing the oil flow through the Strait of Hormuz.

Meanwhile, there is a supply uncertainty elsewhere in Libya, Yemen and Syria. This doesn’t help the west’s situation, as it means Tehran can up the prices as the oil is in such high demand.

A report from the US department of energy said, “Oil prices continue to face upward price pressure because of supply uncertainty resulting from ongoing unrest in the oil-producing regions of the Middle East and north Africa”.

Italian PM refuses to back down, despite possible no-confidence vote

7 Nov

The future of Italian Prime Minister Silvio Berlusconi’s government looks increasingly shaky, as thousands of angry protestors took to the streets of Rome, demanding his resignation. They want a new leader who will lead them out of economic crisis, in order to lower the debt of the euro-zones third largest economy.

This is amidst market fears that Italy may be next in line to need a bailout from its European partners. If this were to happen, it would be more serious than the crisis in Greece due to its size.

With the combination of a parliamentary majority constantly in doubt, as well as rising international criticism, the Wall Street Journal state Mr. Berlusconi no longer has the ability to make serious policy moves.

Furthermore, Berlusconi may also face a no-confidence vote, which he could lose if potential defectors stick to their guns. A scheduled ballot on Tuesday will reveal the votes of once faithful members who have threatened to vote against the government.

Despite this, he refuses to stand down. He said in a statement on Saturday, “I am sorry to disappoint, but responsibility in the face of voters and the country requires… our government to continue this battle”.

Sovereign-debt consultant Nicholas Spiro said, “Mr Berlusconi may still be in office, but he has not been in power for some time”.

When a government loses its parliamentary majority in Italy, the solution is either the formation of a shuffled administration, the formation of an interim so-called technical government charged with finishing urgent business, or new elections.

If early elections are called, it is unclear who will step up to challenge the premier. The left-wing opposition is in disarray, and a group of centrist forces also opposed to Mr. Berlusconi have a number of leaders who draw from disparate constituencies, ranging from pro-Vatican forces to secularist ones.

If a technical government is forged, many lawmakers have said former EU competition commissioner Mario Monti could be tapped to take the helm.

There have been several meetings between Democratic Party leader Pier Luigi Bersani and President Giorgio Napolitano, Italy’s head of state, to discuss the state of Italy’s economy. Mr Napolitano has the power to dissolve Parliament if Mr. Berlusconi no longer has a strong enough majority to govern.

Worrying times, as the Wall Street Journal said it is possible his parliamentary majority could fall apart as early as next week.

So what would Mr. Berlusconi have to do to turn things around and get the people back on his side? European leaders at the G-20 summit in Cannes asserted he must stick to commitments, including the loosening of Italy’s strict labor code, lightening the state’s pension load, and privatizing state assets. The Wall Street Journal reports how according to people familiar with the matter, officials from the International Monetary Fund are expected to arrive in Rome as early as Monday to ensure Italy is sticking to its pledge. Yet the European leaders have not been convinced by Mr. Berlusconi’s promises of an overhaul.

The Italian PM has faced many scrapes during his 18 years in politics, but will this be the final nail in the coffin? The Wall Street Journal said he may well survive what is shaping up to be the most dangerous upheaval in his ranks since his latest term began in 2008.

Dollar relying on Euro to stay afloat

4 Nov

With all the drama in the Eurozone as of late, it is the US Dollar taking centre stage today as it appears more vulnerable than the euro.

Whilst the US economy is better than it’s low in August, with help from the Japanese intervention to weaken the Yen, it’s performance is still not to standard – the dollar has fallen almost 3 percent against the Euro this year. The Financial Times state the US economy, considered to be a relative haven, hasn’t managed to bounce from the Eurozones debt crisis, which shows its reliance on the central bank to balance a dual commitment. Combined, their aim is to maintain stable prices and maximum employment.

Alan Ruskin, strategist at Deutsche Bank said, “The primary negative of the dollar is that it has a central bank willing to pursue unorthodox policy and, while that won’t stop dollar appreciation, it does explain why the euro has not sold off more”.

The Feds Chairman, Ben Bernanke, has been considering options should the economy require further help. Purchasing of mortgage backed securities has been suggestion as one possibility.

Meanwhile, Mario Draghi, the new ECB president, warned of a “mild recession” in Europe. This will not help the US economy recover. Whilst some analysts argue the euro is set to weaken, others believe it will not hit the low of $1.19 when Greece’s debt problems erupted.

Instead, analysts predict it will fall to $1.30 over the next few months, returning to January’s low, but not the critical levels of 2010.

Head of global rates and currencies research at Bank of American, David Woo, says the bank is maintaining a 2012 year end target of $1.40.

Mr Ruskin explains how for a single currency to breakdown, “You need to see a rupture of the eurozone core that results in capital flows leaving the euro”. The Financial Times states that although this is not impossible, it is not yet regarded as the most probable outcome.

Uneven Split in Fed Votes

3 Nov

The US Federal Reserve have voted… and the split in votes were far from even, although the general outcome of keeping interest rates on hold , and maintaining its bond-buying programmes were expected. This move will encourage more borrowing and investment. Chairman Ben Bernanke said the Fed was also considering changes to its communication strategy.

The committee voted 9-1 in favour of the statement, with the one dissenter being Charles Evans, an improvement from the 7-3 vote recorded in September. Mr Evans wanted the fed to take further action to boost the economy, although others fear that his methods would run the risk of higher inflation.

Eric Stein told the Financial Times Mr Evans position as sole dissenter, “could be a signal that his policy views were gaining ground”.

So what would Mr Evans do? He thinks the fed should keep interest rates low until unemployment falls below 3 percent, as long as inflation remains below 3 percent.

Mr Bernanke said unemployment was too high, and the economy was “dissatisfying”. Economists polled by Bloomberg predicted Friday’s figures would show the US Economy added 95,000 jobs in October. Also, a report from a placement company showed that job cuts have been the lowest levels since June, but lay-off announcements are still 12.6per cent higher than a year ago.

However, it’s not Mr Evans vote that has been causing discussion amongst analysts. They’re more concerned by the politics of the votes, regarding the three hawks who voted in favour.

Paul Ashworth said, “the view of the hawks is that, once the decision has been made by the majority, it just causes confusion if they continue to roll back action that has already been taken”.

Two banks… A lot of cuts

2 Nov

Current job loss figures suggest the Swiss Bank Credit Suisse has faced the full brunt of the European sovereign debt crisis, with the company cutting 1500 jobs, on top of the 2000 cuts announced in July.

And Credit Suisse aren’t the only ones making job cuts… Japanese Normura will be slashing costs by 1.2billion dollars, after seeing losses of 46.1billion yen from a disappointing second quarter.

Both banks performed below expectations, both have been hit hard by anaemic economic recovery in Europe and the US.

So what’s next for Credit Suisse and Normura? Credit Suisse’s chief executive Brady Dougan is busy promoting the banks business model as a more regulated, less profitable climate for investment banking. Mr Dougan plans to reduce risk weighted assets in the fixed income business by 113billion by the end of 2014. To reach this goal, Credit Suisse aim to leave unsecured trades, and decrease its secuitisation businesses, whilst tightening its richest clients, the ultra high net worth individuals. Furthermore, the bank hopes to focus on emerging markets.

Shareholders are remaining cautious. The banks shares fell by more than 8 per cent on Tuesday, resulting in the shares being down 36 per cent for the year.

Meanwhile, Takumi Shibata, chief operating office of Nomura, said the bank “aims to get through these cloudy times with a lower expense base”. At an analysts meeting Mr Shibata asserted that the company would not be shutting down divisions or regions, predicting its healthy balance sheet will allow it to redeploy its resources to build up its franchise again.

As with Mr Dougan’s claims, Mr Shibata has not been convincing analysts, who criticized his optimistic claims. Jun Shiota, analyst at Daiwa Capital Markets in Tokyo said, “Normally things do not work that conveniently. If the market improves they will rebound, but it is unlikely that they can rebound more than their western competitors”.