China's economy: Inflection point?
Published: Tue, 31 Jan 2012
[CDATA[ The Daiwa China Momentum Gauge (DCMG), which tracks 20 economic indicators and counts the number of them exceeding their 12-month moving averages, dropped from 3 to 2 in the latest period (mainly covering December data – see chart and table below). This took the index to its lowest level since September 2008. But with eight of the 20 indicators strengthening in the latest period (compared with three previously), this latest DCMG provided tentative signs that the Chinese economy may be coming to an inflection point.The indicator that dropped below its 12-month moving average in December was floor space started, providing further evidence that the property market continues to deteriorate. In December, the volume of property sales fell for the third consecutive month, while growth in property investment plunged to 12.3% YoY, the weakest in the past two years.However, the rise in the number of indicators improving over the previous month (eight in December versus three in November) is encouraging. These include the official PMI, industrial production, electricity output, retail sales, auto sales, trade balance, bank lending and M2 growth. While some of the improvements may be explained by random factors, we judge it also reflects the initial impact of recent...... (read more) ]]...
Published: Thu, 26 Jan 2012
[CDATA[ Last night’s FOMC meeting saw the Committee not only make a striking shift in its policy plans, indicating that short-term interest rates will be kept “exceptionally low” at least through late 2014, but also saw it announce inflation and unemployment rate targets as well as provide for the first time the interest rate forecasts of the FOMC members.The interest rate forecasts inevitably grabbed most attention and they certainly provided a fresh insight into the FOMC’s thinking. Of the seventeen FOMC participants (ten of which are voting members), only three expect the first interest rate increase to come this year, with a further three expecting it to be in 2013. Six expect the first increase in 2014, while 4 don’t expect an increase until 2015. Rates therefore look to be on hold for at least another two years. And even by the end of 2014 6 members expect rates to be unchanged while 11 of the 17 expect the fed funds rate to be 1% or less. Timing of Fed Tightening Source: Federal Open Market Committee Pace of Fed Tightening* * Each dot in a particular year represents the expected federal funds rate of a Fed official. Each year contains...... (read more) ]]...
Japan: Trading on past glories?
Published: Wed, 25 Jan 2012
[CDATA[ Japan’s initially vigorous post-quake economic rebound has long petered out. Activity levelled off over the summer and into the autumn, taking a step down in November. A key weakness in the final quarter was external trade, with export volumes down almost 4%Q/Q. And with import volumes up more than 1%, the trade balance, which shifted into deficit immediately following the quake, deteriorated further. So, it was a mere formality when data released earlier today confirmed that in 2011 Japan registered a full-year trade deficit for the first time since 1980. Japan’s trade balance has been eroded steadily from both sides of the equation. For a start, Japanese exporters have failed to recoup the market share lost in the immediate aftermath of the collapse of Lehman Brothers, unable to capitalise fully on their proximity to dynamic Asia, which continues to register the world’s highest import growth rates. Moreover, having briefly regained their market share globally by 2010, they began to lose ground once more even before last year’s earthquake (see chart). The most recent weakness in exports is partly attributed to disruption associated with the Thai floods, something that is gradually being overcome. But, more fundamentally, Japanese exporters appear to have...... (read more) ]]...
Published: Thu, 19 Jan 2012
[CDATA[ 2012 has got off to a fairly positive start for the euro area. Notwithstanding S&P’s decision to downgrade nine euro area countries last week, both Italy and Spain have maintained bond market access, with yields in both countries now well below the highs seen in late-2011.So, is the worst of the crisis behind us? Or is this merely a period of calm ahead of an even bigger storm? Yesterday we published our euro area strategy outlook for 2012, which highlights the myriad challenges still facing the euro area. While our central view is one of “muddling through” we conclude that the risks lie heavily towards a further escalation of the crisis.Of all the risks, the most imminent, and arguably the one with the potential to cause the most mayhem, is that posed by negotiations around the second bailout package for Greece. This second bailout, agreed by euro area leaders in October, is contingent on (a) the Greek authorities continuing to meet the budget and reform conditions attached to the bailout packages and (b) private sector creditors taking a sufficiently large haircut on their holdings to make the sums add up.Given weaker than expected growth and slow progress on implementing reform...... (read more) ]]...
Quarterly Economic Outlook (Q1 2012)
Published: Mon, 09 Jan 2012
[CDATA[ The global economy entered 2012 with the outlook as uncertain as at any time since 2008. Growth globally softened through the second half of 2011 and will fail to regain momentum over the near term. While the US economy was an exception in seeing stronger growth in the final quarter of the year, it failed once again to reach escape velocity as the hangover from the financial crisis remained hard to shake off. But it is developments in the euro area debt crisis, of course, that dominated economic and market sentiment in 2011 and will continue to do so through 2012. There are myriad paths the crisis could take from here, but we have assumed that a “muddling through” scenario is the most likely outcome – certainly that is the revealed preference of euro area policymakers who have repeatedly failed to demonstrate an appetite for delivering a lasting solution to the crisis.“Muddling through”, of course, implies continued high uncertainty, onerous funding costs for many countries, continued banking sector stress and crushing austerity measures across much of the euro area. Given this backdrop, recession is unavoidable, and we expect the euro area economy to shrink in 2012. The UK also looks...... (read more) ]]...
Published: Thu, 22 Dec 2011
[CDATA[ This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FSA. The understandably secretive nature of central bank liquidity operations has meant that it normally takes months, or even years, to determine which institutions had tapped emergency funding. Yesterday, it only took a matter of hours for Reuters to reveal that Italian banks had accounted for €116bn, or almost 25%, of the €489bn in three-year loans offered to euro area banks by the European Central Bank this week. The largest domestic bank, Intesa Sanpaolo, even went on to publicly verify its involvement later in the day, saying that it had borrowed €12bn from the ECB using freshly-issued state-backed bonds as collateral.So, how reliant now are Italian banks on ECB funding? As of end-November 2011, Italian banks had borrowed a total of €153bn from the ECB, up from €111bn one month earlier and only €41bn in June. To put this in context, loans from the ECB represented just under 4% of the Italian banking system's total liabilities as of November 2011, up from as low as 1% as recently as June. The same figure for the Spanish banking system...... (read more) ]]...
Japan: Set for a bleak midwinter?
Published: Thu, 22 Dec 2011
[CDATA[ When its latest Policy Board meeting concluded yesterday, there were no prizes for guessing that the BoJ left its monetary policy, including the size of its asset purchase programme and fund-supplying facilities, unchanged. However, the meeting was not without note, with the BoJ's statement providing a bleaker assessment of current conditions than of late (see table at end), stating that the recent post-quake pick-up in Japan’s activity has paused and that output is expected to remain flat for the time being. The sharp appreciation of the yen – which was the main trigger for the most recent dose of monetary easing in October – as well as softer global demand have no doubt had a marked impact on the momentum of Japan’s recovery, a point reinforced by yesterday's disappointing trade report. Export volumes declined for the second successive month and by a sharper-than-expected 2.7% on the month, to leave them down 0.5% on a 3M/3M basis – the first such decline since June. And with import volumes up 1.4% on a 3M/3M basis, in the absence of a marked improvement in the trade balance in December, net trade looks set to have weighed on GDP growth in Q4.Export and import...... (read more) ]]...
China: The darkness before dawn?
Published: Wed, 21 Dec 2011
[CDATA[ The slowdown in the Chinese economy appears to be continuing and becoming ever more widespread. The official manufacturing PMI fell to 49.0 in November, indicating the first month-on-month contraction in industrial activity since the Lehman crisis. Meanwhile, the property market is deteriorating quickly. The volume of property sales fell by 1.7% YoY in November after dropping 9.9% YoY in October. Out of the 70 cities that NBS tracks, 49 cities recorded month-on-month declines in residential property prices in November. Due in large part to funding constraints, property investment has now been falling for four consecutive months. And as a result of slowing property investment growth, as well as weak infrastructure investment, total fixed asset investment (FAI) growth fell below its 12-month average for the first time in 14 months.The breadth of the slowdown is reflected in our Daiwa China Momentum Gauge (DCMG), which tracks 20 economic indicators and counts the number of them exceeding their 12-month moving averages. This dropped from 4 to 3 in the latest reporting period (mostly for November), the lowest level in three years. Out of the 20 indicators, 17 softened in the latest period (compared with 14 in the previous period). Daiwa China Momentum Gauge Source:...... (read more) ]]...
The German Bund conundrum: Short or long in 2012?
Published: Mon, 19 Dec 2011
[CDATA[ Predicting yields on euro area bonds has become a lot harder since the outbreak of the debt crisis. Before the crisis, movements in yields mainly reflected changes in the outlook of major economic fundamentals, most notably projections for growth, inflation and monetary policy. The crisis, however, has added an important and (even) less predictable dimension: the degree to which national debt is considered a ‘safe haven’.From this perspective, recent investment flows are a conundrum. Throughout the crisis, German Bunds have served as the prime safe haven, with yields along the curve touching record lows a few weeks ago, despite the supposed common destiny (“Schicksalsgemeinschaft”) Germany shares with its fiscally-troubled neighbours. A dreadful auction in November, when Germany couldn’t place around 35% of its bonds, remained the exception to the rule.But are Bunds likely to retain their safe-haven aura in 2012? If the crisis remains on a ‘slow burn’ with neither a resolution one way or the other, nor an escalation, chances are that they will. However, once the crisis is resolved – for better or worse – German Bund yields seem bound to correct.What will happen to Bunds if we have a ‘happy ending’? If the debt crisis can be...... (read more) ]]...
Euro area: Crunch time round the corner?
Published: Fri, 16 Dec 2011
[CDATA[ The morning after last week’s EU summit we were cautiously optimistic that euro area leaders had taken a small step forward towards a more meaningful resolution of the debt crisis. We should have known better. As ever in the “doublethink” world of euro area summits, it has rapidly become apparent that what leaders apparently signed up to bears little resemblance to what they will actually do.We never thought that much of the fiscal compact. It did nothing to address the immediate challenges posed by the debt crisis, while forcing the euro area into a deflationary fiscal straitjacket. In any case, it has becoming increasingly clear that putting in place the beefed-up sanctions regime without a Treaty change, something that the UK has effectively vetoed, will be impossible. The fiscal compact, therefore, looks to have been drowned at birth, at least in the form envisaged Thursday evening.But we were hopeful that agreement on stricter fiscal rules had opened the door for the possibility of additional financial resources for bailouts. That hope now looks to have been misplaced. First, Chancellor Merkel, who increasingly resembles a fifth-columnist for those who want to see the euro destroyed, on Tuesday ruled out any increase in...... (read more) ]]...
Which Asian central bank will ease next?
Published: Mon, 12 Dec 2011
[CDATA[ The central banks of Korea (BOK) and Indonesia (BI) both kept their policy interest rates unchanged at their monetary policy meetings on 6 December. The decisions were in line with our expectations and do not change our view that Asia’s central banks have already entered an easing cycle. Changes in policy rates since 30 September 2011 Source: CEIC, Daiwa In fact, since 30 September 2011, two Asian central banks have cut rates, with BI cutting twice, by a total of 75bps, and Bank of Thailand (BOT) cutting once, by 25bps. While the central bank of China (PBoC) did not cut interest rates, it cut the reserve requirement ratio (RRR) by 50bps in a surprising move on 30 November, the same day that six major central banks in the developed world announced a 50bp cut in the US-Dollar liquidity swap rates in an effort to ease financial firms’ funding conditions.We expect most of Asia’s central banks to start cutting rates soon. Real GDP growth in almost all 10 economies we cover (except for Malaysia) has declined since Q410. We expect the declines to continue into Q411 and Q112, forcing more central banks to switch focus from inflation to growth. For example, while the...... (read more) ]]...
Asian export growth: Starting to plunge
Published: Mon, 12 Dec 2011
[CDATA[ Hopes have diminished that Asia’s economies might remain unscathed from the present bout of turbulence in the euro area. The latest trade data revealed a synchronized slowdown in export growth among Asian economies in the autumn. China’s export growth continued to moderate, falling to 13.8% YoY in November from 15.8% YoY in October; India’s fell sharply to 3.7% YoY from 10.8% YoY; Taiwan’s plunged to 1.3% YoY from 11.7% YoY, while Malaysia’s eased to 14.5% YoY in October from 17.3% YoY in September. And while Korea’s export growth picked up to 13.8% YoY in November from 8% YoY in October, that was largely due to a very low base last year.The slowdown in export growth seems mainly driven by weaker demand from Europe. For example, China’s exports to Germany fell by 1.6% YoY in November (versus a 7.2% YoY gain in October) while its exports to Italy fell by an extraordinary 23.3% YoY. Taiwan’s exports to the EU plunged by 21.9% YoY; and Malaysia’s export growth to the EU also slowed to 4.5% YoY.There are signs that Asian exports are likely to weaken further in the coming months as the euro area crisis deepens. China’s processing import growth weakened to...... (read more) ]]...
Published: Fri, 09 Dec 2011
[CDATA[ Mario Draghi’s comments yesterday, ruling out a more significant role for the ECB in buying euro area government bonds, had cast a dark pall over markets as EU leaders gathered last night in Brussels for their latest make-or-break summit. But while market reaction to the agreement reached last night on additional measures to strengthen the policy response to the crisis was initially downbeat, there are (possibly) a few reasons to be cheerful with what euro area leaders agreed last night.Last night’s agreement had two main strands: a new ‘fiscal compact’ to set tighter budgetary rules enforced by sanctions; and proposed enhancements to the financial resources available to provide support to countries facing funding difficulties. Predictably, the main elements of the fiscal compact are based closely on the Merkozy agreement reached earlier in the week. Budgets will have to be balanced or in surplus (or, to be more precise, annual structural deficits should not exceed 0.5% of nominal GDP); That objective will have to be introduced in Member States' national legal systems at constitutional or equivalent level, verified by the European Court of Justice; If budgets deviate from balance, an automatic correction mechanism will be triggered to tighten policy; Member states will have to have their debt...... (read more) ]]...
Published: Tue, 06 Dec 2011
[CDATA[ Despite the improvement in market sentiment seen over the past week or so, this Friday’s European summit increasingly looks like crunch time for the euro. Following Moody’s threat a little more than a week ago of significant downgrades to several European sovereigns in the New Year, S&P followed suit overnight, placing the ratings of all euro area sovereigns that matter, including Germany, on negative creditwatch. That implies a probability of more than 50% that these ratings will be downgraded, with S&P aiming to complete its review as soon as possible after the summit. And, of course, any sovereign downgrades will hit the rating of the EFSF.So, what hope is there that the rating agencies will hold their fire? Among the key reasons justifying S&P’s decision, the agency cited the ‘open and prolonged dispute among European policymakers’, which has allowed the crisis to escalate. Over recent days, however, euro area policymakers have appeared, for once, to be singing from the same hymn sheet, albeit a German one. Yesterday’s bilateral meeting between Merkel and Sarkozy saw the two leaders outline joint proposals to enshrine in law balanced budget rules and automatic sanctions for member states which flout them. The new Italian government...... (read more) ]]...
Further loosening from the PBOC on the cards
Published: Thu, 01 Dec 2011
[CDATA[ Summary The PBOC’s surprise announcement yesterday of a 50bp cut in the required reserve ratio (RRR) was its first reduction of the current cycle. The move suggests that Chinese policymakers are increasingly concerned about the downside risks to growth. We now expect the PBOC to reduce the RRR by a total of 200bp over the course of 2012. The PBOC’s surprise announcement yesterday of a 50bp cut in the required reserve ratio (RRR) was its first reduction following 12 hikes in the past two years. The benchmark RRR will drop to 20.5% (21% for large financial institutions and 19% for small- and medium-sized ones). This will take effect on 5 December 2011.RRR and benchmark policy rates Source: DEIC and DaiwaWe estimate that the latest RRR cut will release some Rmb396bn of liquidity into the banking system. M2 growth in October dipped to a ten-year low of 12.9% YoY. After this move, we expect the tight liquidity conditions in the banking system to ease, and thus banks’ lending capacity will improve.The PBOC’s move signals that worries about an economic slowdown in such an uncertain global environment now override inflation concerns. Policymakers have shifted their focus to growth and they are open to stronger loosening measures if...... (read more) ]]...
Growth in Asia rapidly losing momentum
Published: Thu, 01 Dec 2011
[CDATA[ Summary Growth momentum in the Asian region is waning rapidly. In India, slowing growth has raised the chances of rate cuts early next year. The Bank of Thailand's (BOT) 25bp rate cut looks set to be followed by more. Indian GDP slows. Odds of rate cut risingIndia’s real GDP growth slowed further from 7.7% YoY in Q1 FY11/12 to 6.9% YoY in Q2, in line with consensus. Domestic demand continued to lead this slowdown on the back of inflation pressure, policy tightening and a deteriorating domestic investment climate. Investment growth plunged from 7.9% to -0.6% YoY, while private consumption weakened from 6.3% to 5.9%. As a result, the growth contribution from domestic demand fell from 7.7 ppt to 4.5 ppt.External demand, on the other hand, held up pretty well, with export growth actually picking up from 24.3% to 27.4% YoY. Domestic weaknesses caused import growth to slow sharply from 23.6% to 10.9% YoY. As a result, the growth contribution from net exports jumped from -1.7 ppt to 2.7 ppt, providing a significant boost to GDP growth.Looking ahead, we doubt that exports can hold up for long in this increasingly hostile global backdrop. Domestic demand has clearly turned decisively weaker than in our previous assessment...... (read more) ]]...
Japan: Geography can be a blessing too
Published: Thu, 01 Dec 2011
[CDATA[ Geography can often seem a curse. The Great East Japan Earthquake in mid-March is an obvious case in point. As Japan’s biggest ever quake and tsunami, it was the nation’s worst post-war catastrophe, causing about 20,000 fatalities, prompting a nuclear disaster, destroying capital stocks worth well in excess of 3% of GDP and significantly disrupting the nation’s electricity supply.From an economic perspective, the quake delivered an extremely sharp supply shock, with the damage triggering a record plunge in industrial output in March. There was a negative demand-side shock too, not least due to the inevitable hit to confidence. But Japan responded swiftly to repair key infrastructure and supply chains, and – contrary to the fears of many doom-mongers – coped ably with electricity rationing over the summer months. And as production steadily recovered so too did demand. So, although the quake caused GDP to contract in both the first and second quarters of the year, stronger exports, private investment and consumer spending helped GDP to grow by 1.5%Q/Q, the strongest rate since the first quarter of 2010, taking output back above its pre-quake level. For countries with strong institutions like Japan, such a profile for activity following a natural disaster...... (read more) ]]...
What if Asian currencies come under attack?
Published: Wed, 30 Nov 2011
[CDATA[ Summary Despite solid fundamentals, Asian currencies are not immune to an acute global financial crisis. All Asian currencies have depreciated in the past weeks Most are well positioned to avoid a major crisis in the event of a currency attack The Rupee, Rupiah and Won could show the largest volatility in the coming months FundamentalsSince 1 August 2011, the Indian Rupee (INR) has depreciated by nearly 19% against US dollar, raising concerns that the European sovereign debt crisis could spread to Asia sometime. In fact, among the 10 economies that we cover, 9 of their currencies depreciated since 1 August, with the exception of the RMB (which also stopped appreciating a month ago).Changes of spot exchange rates against USD since 1 AugustSource: CEIC and DaiwaJudging from the changes in FX reserves since the end of August, all Asian central banks (except HKMA) intervened in the FX market to stabilize their currencies, causing declines in their FX reserves. In particular, FX reserves fell by 9.1% in Indonesia in just two months (September-October), suggesting significant pressure on Bank Indonesia to defend the Rupiah.Change of FX reserves (Aug 2011 - Oct 2011)Source: CEIC and DaiwaIn our view, most Asian currencies have strong support from economic fundamentals. All economies,...... (read more) ]]...
Published: Tue, 29 Nov 2011
[CDATA[ So far this week, markets have sounded a more optimistic note. Equities have registered gains and euro area sovereign spreads have narrowed, while Italy and Belgium have managed to sell about €10bn of new bonds. The better performance appears partly to reflect (in our view unfounded) hopes that the long-awaited enhancements of the EFSF’s toolkit, to be agreed this evening by euro area finance ministers, might deliver a remedy to the euro area’s ever-worsening debt crisis. And so, it appears that yesterday’s stark warning by Moody’s, that it is now reviewing its credit ratings of all EU member states, has been largely ignored, at least for now.Ignoring Moody’s stark report, however, might turn out to be very costly for those who haven’t yet positioned themselves for the most chilling winter in the short life of the euro area. Moody’s message was crystal clear: unless market confidence returns by early in the New Year – through whichever means – Moody’s will give a massive ‘two fingers’ to the whole euro project via an unprecedented series of downgrades of the credit ratings of possibly all euro area member states, including the strongest.The probability that the present policy toolkit could survive a downgrade...... (read more) ]]...
The UK: Set to 'Out-Japan' Japan?
Published: Fri, 25 Nov 2011
[CDATA[ With the euro area debt crisis escalating, after this week’s pitiful UK GDP data for the third quarter – with growth driven entirely by (presumably involuntary) stock-building – and ahead of next week’s Autumn Statement by the Chancellor, we have updated our UK economic forecasts. And they make very grim reading. We now forecast a contraction of GDP in Q411, zero GDP growth in 2012, and growth of little more than 1% in 2013 and growth remaining below its pre-recession trend in the following two years. And the risks to that downbeat outlook, not least from the euro area debt crisis, are biased markedly to the downside. This means that the level of UK real GDP will not return to its pre-recession peak, reached in the first quarter of 2008, until the second half of 2015, i.e. after the next general election. This is a woeful performance, with the level of output remaining below its pre-recession level for longer than any equivalent such period suffered by Japan during its past so-called two ‘lost decades of growth’. Unemployment will continue to rise through 2012, with 3 million unemployed and a double-digit unemployment rate on the ILO measure not unthinkable. Inflation, meanwhile, will fall clearly...... (read more) ]]...
Deflation - not inflation - to provide the answer to Europe's debt crisis?
Published: Thu, 24 Nov 2011
[CDATA[ This week’s events have served as a reminder that the endgame to Europe’s debt crisis is rapidly approaching. Germany, the euro area’s paymaster, faced a massive shortfall in bids at its most recent 10Y Bund auction, forcing the Bundesbank to act as a lender of last resort, taking 35% of the issue, with the resulting market moves pushing German yields nearly 30bps higher in just two days.While it is too early to say if the euro area’s last bastion has fallen and Germany has joined the club of nations whose debt is being shunned, the auction’s failure has certainly reinforced the fear among investors that the euro’s future is dangling by a thread.With the entire currency union now on fire, liquidity drying up rapidly and spreads close to record levels for all member states, markets appear to be increasingly losing hope of a happy end to the crisis. Certainly, the current inadequate patchwork of policy responses cannot stop the crisis from spreading further.Unlimited ECB purchases of euro area government bonds are increasingly viewed as the (only?) solution to the crisis. But in isolation, that would merely delay the death of the euro – it would not prevent it. Without deep...... (read more) ]]...
Time running out for a happy ending?
Published: Fri, 18 Nov 2011
[CDATA[ Just three weeks on from the summit at which euro area leaders supposedly delivered their comprehensive solution to the debt crisis and things are worse than ever. Having tightened immediately after the summit, spreads have subsequently widened markedly. And not just for the usual PIIGS suspects – the French 10Y spread to Bunds is now around 60bps higher than on the day of the summit, while both the Netherlands and Finland, previously largely immune to contagion, have also seen their spreads rise.Change in euro area sovereign bond spreads since summit**Change in the 10Y spread to Bunds between 26 October and 18 November. Source: Bloomberg and Daiwa Capital Markets Europe Ltd.Numerous factors, including the threat of a Greek referendum and political uncertainty in Italy and Spain, have contributed to the deterioration in market conditions. But, fundamentally, it has been the lack of policy clarity, and a growing realisation that the policy options available to deal with the crisis are both few and unpalatable, that have been the main drivers behind recent market moves. Public utterances from policymakers that some countries could possibly leave the euro area, a previously taboo subject, have added to those fears.It quickly became apparent that the so-called...... (read more) ]]...
Banks slashing sovereign exposure in race to deleverage
Published: Fri, 04 Nov 2011
[CDATA[ This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FSA.That Italian government bond yields continue to march higher should come as no surprise to investors: 120% debt-to-GDP ratio, a government on the brink of collapse and serious doubts over the ability of last week’s “grand plan” to contain the sovereign crisis. But cast an eye over the third-quarter results of European banks and you’ll see another reason why Italian bond prices have continued to slide – there are plenty of eager sellers.Yesterday, both ING Group and BNP Paribas revealed that they had slashed their sovereign bond portfolios over the third-quarter. Unsurprisingly, most of these reductions were in the debt of Italy (Europe’s largest government bond market), aided by redemptions and ECB purchases, and Greece, the result of increased write downs.ING reduced its government bond exposure to Spain, Italy, Greece and Portugal by €4.8bn to €6.1bn in third quarter, with Italian holdings cut by €3.9bn to €3.4bn. Meanwhile, BNP reduced its sovereign debt exposure to the euro area programme countries (Greece, Ireland and Portugal) by 38% to €3.3bn in the four months to 30 October 2011, while...... (read more) ]]...
Why now Mr. Papandreou? What a Greek exit means for Europe.
Published: Thu, 03 Nov 2011
[CDATA[ Papandreou’s decision late Monday night to call a referendum on the Greek bailout agreed last week took everybody (even his closest allies) by surprise. And it was a move that embarrassed his European partners and sent new shockwaves through financial markets.With the world still puzzled by Papandreou’s move and markets still hungover from Tuesday’s massive plunge, the situation in Greece remains as uncertain as ever. Markets took Papandreou’s decision at face value, preparing for a disorderly default and a Greek exit from the euro area. But whether or not Papandreou is indeed toying with the idea of leaving the euro area must be in doubt and his motivations are likely to have been driven by a desire to force the opposition to show its support for the deal reached last week.In fact, it now looks unlikely that a referendum will take place, although Papandreou might still lose the confidence vote on Friday, leaving it to a subsequent government to decide the future path of Greece. What we certainly know, however, is that euro area governments will suspend the payout of the next, €8bn, tranche of bailout cash, which just a few days ago seemed a formality, until there is clarity...... (read more) ]]...
Bank recapitalisations undermined by widening sovereign yields
Published: Thu, 03 Nov 2011
[CDATA[ Just one week on from the conclusion of the supposed make-or-break summit the spiralling Greek crisis, together with mounting doubts over the viability of the EFSF leveraging proposals, has left euro area leaders’ grand plan to resolve the crisis in serious doubt. Sovereign bond yields, naturally, are on the move.Meanwhile, as European banks begin reporting their third-quarter results, the predictable focus is on capitalisation following the summit decision to set out new minimum standards, identifying a preliminary capital deficit of €106bn across Europe. The final capital shortfalls – to be released later this month – will be calculated reflecting end-September balance sheets and government bond prices. But as the chart below demonstrates, sovereign yields have moved significantly since 30 September.This fact alone means that the “mini” stress test exercise is already looking inadequate. Of course, bank recapitalisations were never going to restore confidence if the broader proposals didn’t kill off sovereign contagion, but even this most straightforward element of the grand plan is rapidly losing credibility.Change in 10-year government bond yields (Sep.30 to Nov. 2)Source: Bloomberg and Daiwa Capital Markets Europe Ltd. Michael Symonds, Credit Analyst Disclaimer: This research report is produced by Daiwa Securities Capital Markets Co., Ltd and/or its...... (read more) ]]...
Published: Wed, 02 Nov 2011
[CDATA[ The surprise announcement by the Greek Prime Minister earlier this week that the government will hold a referendum on whether or not to accept the terms of the latest bailout package triggered a violent market reaction, with equity markets and peripheral euro area government debt selling off sharply and “safe-haven” government bonds heading back towards the record highs seen in September. The market instability even forced the EFSF to postpone a bond sale planned for Wednesday.That means that, less than a week on from the summit where euro area leaders had promised to deliver a comprehensive solution to the debt crisis, market sentiment is arguably even worse than before it was called. And while it may have been the shock announcement from Athens that triggered the violent market reaction, arguably all that news did was to accelerate what would have happened anyway following the disappointing conclusion to last week’s summit.So, is there any hope that euro area policymakers can make the decisions announced last week ultimately work? We are doubtful. But there are several key events worth watching over coming weeks. This week’s G20 summit is clearly crucial. Markets are looking (hoping?) for any signs that other G20 countries are...... (read more) ]]...
Published: Thu, 27 Oct 2011
[CDATA[ Euro area leaders had promised that last night’s summit would deliver a “comprehensive solution” to the euro area’s debt crisis. But euro area leaders failed to deliver. While there were fairly comprehensive programmes to deal with the sideshows of the crisis – Greece and banks – the summit failed to deliver clear agreement on the much more important issue of how to leverage the EFSF and stop contagion once and for all. So, where does that leave us? This blog looks in detail at last night’s deal.Greek debt restructuringWhat was agreed? To increase the “voluntary” haircut on private investor holdings of Greek debt from the 21% NPV reduction agreed on 21 July to a 50% nominal reduction. Official sector (euro area plus IMF) will provide an additional €100bn of funds to Greece to provide financing up to 2014. The additional bailout package will provide for the recapitalisation of Greek banks. While the restructuring will not trigger a CDS credit event according to ISDA (International Swaps and Derivatives Association), rating agencies will attach a default rating to Greece. So, a scheme will be put in place to ensure that Greek banks still have access to ECB liquidity. What’s still to be decided? There is only...... (read more) ]]...
EFSF, not bank capital, the key
Published: Thu, 27 Oct 2011
[CDATA[ When compared with the rest of the package announced by euro area leaders last night, the proposals aimed at restoring confidence in the banking sector were fairly fully-formed, with target capital ratios and a timeline to achieve those both agreed. And while some important details still need to be worked out, by the middle of next year 70 euro area banks should all be significantly better capitalised than they currently are. But the announcement did little to change our view that the recapitalisations are largely irrelevant - perhaps even a further destabilising factor - if market participants don't consider that the broader plan has killed off concerns that the a wider euro area sovereign debt restructuring is on the cards.The basic proposals on bank capital were largely in line with pre-summit leaks and speculation. Seventy of the EU’s largest banks will be expected to temporarily meet a “Basel 2.5” core tier 1 capital ratio of 9% after accounting for market valuation of sovereign debt exposures as of 30 September 2011. Banks will have until 30 June 2012 to address any shortfalls and will first be expected to raise any capital required from private sources, including hybrid debt to equity conversions,...... (read more) ]]...
European bank recapitalisations could add to instability
Published: Wed, 19 Oct 2011
[CDATA[ Ahead of this weekend’s EU Heads of Governments summit expectations have been high – once again – that European politicians will finally deliver on their promise of a comprehensive plan to end the crisis. Last week our euro area economist surmised why a “bazooka” solution was unlikely, while comments from key protagonists in recent days, including Germany’s Finance Minister Schaeuble, should have served to somewhat dampen optimism over the outcome.What we do know is that a key part of the planned offensive will be proposals to deliver a strengthening of European banks through recapitalisations. While we will need to wait at least until the summit concludes for the important final detail, there have been enough hints from involved parties to allow us to hypothesise with some confidence about how the bank recapitalisation process may proceed.The proposals are expected to require the EU’s largest banks to hold a core capital ratio of at least 9% after accounting for impairments on their holdings of Greek government bonds and the marking-to-market of all other sovereign debt exposures. Of course, the move to apply prudent valuations to sovereign exposures represents a sensible improvement on the ineffectual EU-wide stress tests from earlier this year.Banks are...... (read more) ]]...
Published: Fri, 14 Oct 2011
[CDATA[ In just over a week it is summit time – again. On 23 October, euro area Heads of Governments are set to meet for the third time this year. At both of the previous summits markets have expected a big bang solution to the crisis, only to end up disappointed.Notwithstanding the previous disappointments, expectations are high once again, not least since German Chancellor Merkel and French President Sarkozy, meeting last weekend, promised to provide a “comprehensive” solution to the debt crisis by the end of the month. Markets are therefore expecting a grand plan that will stop contagion and boost investor confidence in the common currency, including a lancing of the Greek boil, a recapitalisation of Europe’s banks and a significant leveraging of the EFSF’s firepower sufficient to shield Italy and Spain from the spreading debt crisis.So, will they be able to deliver this time? In a word, no.On Greece – in many ways a tragic side-show these days – the consensus, with the seeming exception of euro area leaders, is that its debt burden is not sustainable. A haircut of at least 60% (and probably more) of all outstanding debt (excluding the IMF but including those bonds hold by...... (read more) ]]...