A Graphical Walk-Through Of An 'Un-Fixed' Europe
Why has the Euro-zone fallen back into recession, and why can't it shake of its seemingly never-ending crisis? Is there light at the end of the tunnel - or is that an approaching train? A walk through the Euro-zone with charts of macro-economic data reveals the crisis is far from over. Instead,most trends are pointing towards further deterioration - facts as opposed to the hope and anecdote that we are bombarded with on a daily basis. While perusing these charts, consider EU President Barroso's comments just today that, "the worst of the crisis is over." You decide.
Full chart pack below...
While retail sales are stagnating in Germany, they are shrinking dramatically in countries that had to be bailed out.The Netherlands are again a surprise, with similar development as in Hungary. In Germany and France, industrial production peaked in early 2011. Other countries (Greece, Spain, Portugal) never really recovered.
Finally, a look at the banking sector. Deposits in Spain and Portugal are bleeding with annual rates of 10%. This, together with rising non-performing loans and increased capital requirements will make banks reduce their lending, choking small and medium-sized companies.This is reflected in declining loans by financial institutions in the PIIGS (with the exception of Italy - for now).
Summary
1. GDP is pretty useless as indicator of economic strength, as it ignores debt accumulated by the largest contributor to GDP (governments).2. If one thing can be gained from looking at real GDP it is the fact that, over the past 12 years, Italy's growth has been inferior to that of Japan. Without any grow, even otherwise (borderline) sustainable debt levels become too much of a burden on the economy.3. Even in times of rapidly declining revenue, governments are unwilling or unable to cut spending unless forced to do so by EU/ECB/IMF.This is the reason why most countries try to resist any bailouts until it is too late (usually when the capital market refuses to further finance its debt).4. Governments do not have any cash reserves; insolvency is only a failed debt auction away and can happen at any time.5. Trade imbalances of the PIIGS are on the mend (but without the major beneficiaries, Germany and Netherlands, giving up any of their surpluses).6. The average interest paid on government debt is surprisingly uniform (3-4%); the subsidy of being member in the Euro zone does not enforce fiscal discipline.7. Unemployment, and especially youth unemployment provides for potentially explosive social tensionsand/or radical political movements, making governing more difficult.8. Debt-to-GDP ratios continue to rise as required fiscal adjustments are too large and recessionary trends take their toll on government finances.9. Despite recent improvements, Germany has still a large advantage in unit labor costs.10. Declining house prices in Spain and Portugal will continue to weigh on banks.11. Collapsing retail sales and industrial production in the PIIGS continue to erode the tax base.12. In Spain and Portugal, trends in deposits look to undermine the banking system and choking small and medium-sized companies.
Conclusions
- Developments in Spain and Italy will lead to further deficits and increase in debt levels.
- At some point, capital markets will refuse to absorb new debt.
- ECB/EU/IMF will be forced to step in, as local banking systems are loaded with government bonds.
- Any government bond restructuring would also impair the banking system.
- Rumors regarding the solvency of banking systems could trigger bank runs, as depositors are warned by the Cypriot example.
- Many years of further austerity seem to be the inevitable result, with potential political and social instability sprinkled in.
- Central banks might be able to paper over (literally) a collapse of the Euro-zone, but still won't be able to prevent stock markets from reacting negatively to recurring crises
Full Presentation below:
http://www.zerohedge.com/news/2013-04-03/putin-offers-3-month-offshore-tax-cheat-amnesty-there-can-be-no-untouchables
Putin Offers 3-Month Offshore-Tax-Cheat 'Amnesty': "There Can Be No Untouchables"
"This is the nationalization of the elite," is how one ex-Kremlin-ite described Putin's new policy. "For [years], the elite saw Russia as a hunting ground - they would keep their money and live somewhere else," but no more, as the FT reports, Putin has moved toinject some moral fibre into the country’s top-level bureaucrats and state employees by giving them a three-month deadline to close their foreign bank accounts and divest themselves of offshore assets – or face the sack. "There is a sort of algorithm [in Russia] for civil servants. You stash a lot of money abroad, send your family to live there, and then when you retire, you join them. This new legislation will put a question mark next to the career plan of a generation of top-level people." Putin's new decree makes it clear,"There are no untouchables and there cannot be any."
Vladimir Putin, the Russian president, has moved to inject some moral fibre into the country’s top-level bureaucrats and state employees by giving them a three-month deadline to close their foreign bank accounts and divest themselves of offshore assets – or face the sack.According to a new presidential decree, signed on Tuesday,thousands of Russian civil servants have until July 1 to file declarations of income and assets, which will be subject to stringent checks. No one would be above the law, said Sergei Ivanov, Mr Putin’s chief of staff, and anyone caught still in possession of the prohibited assets would be instantly dismissed.“There are no untouchables and there cannot be any,” he said.The decree is the president’s latest move to “de-offshore” Russia’s economy,...“This is [the] nationalisation of the elite,” said Konstantin Kostin, the former Kremlin deputy head of domestic policy who now heads the Foundation for the Development of Civil Society, a Moscow think-tank.“For a long time, many in the elite saw Russia as a hunting ground – they would keep their money and live somewhere else,” he added. “That problem cannot be addressed by one law, of course, but only by political willpower and the consolidation of society around the idea.”...Mr Putin’s decree is apparently intended to stiffen political spines and spur the passage of a law rather than do away with the need for one, with conventional legislation seen as giving the anti-corruption drive a greater mandate.“The [foreign assets] law will go through, but not in the expected timeframe,” said Mr Kabanov. “[The elite] needed a decree to demonstrate to them the president’s resolve, and to introduce the new reporting requirements in time for this year.”...Ksenia Sorokina, editor of Moscow-based Snob magazine, said: “There is a sort of algorithm [in Russia] for civil servants. You stash a lot of money abroad, send your family to live there, and then when you retire, you join them. This new legislation will put a question mark next to the career plan of a generation of top-level people.”However, the decree appeared to contain loopholes. For example, Yevgeny Shkolov, a senior official in the president’s administration, told the news agency Interfax that revenues of companies registered to family members of civil servants need not be declared....
http://www.zerohedge.com/news/2013-04-03/dutch-ing-bank-suffers-technical-glitch-clients-report-negative-balances
Dutch ING Bank Suffers "Technical Glitch", Clients Report Negative Balances
UPDATE: Another Dutch bank - Rabobank - is apparently having 'technical' issues now
Following yesterday's discussion of the brink-like nature of the Dutch economy (and banking system), it is perhaps just a coincidence that ING is suffering from a major failure in its Internet Banking. It is unclear how many customers are affected but judging by the scale of responses on Twitter (#ING) it is widespread. Some customers are reporting overdrafts, and incorrect balances; and are reporting cards not working at supermarkets. We are sure this will just bolster confidence in uninsured depositors at the bank - especially since, as Ad.nl reports, no one at ING was reachable for comment.
http://www.zerohedge.com/news/2013-04-03/overnight-sentiment-driftless
Overnight Sentiment: Driftless
- Bank of Japan
- CDS
- China
- CPI
- Dennis Lockhart
- Equity Markets
- European Central Bank
- European Union
- Eurozone
- FINRA
- France
- Germany
- Gross Domestic Product
- headlines
- International Monetary Fund
- Italy
- Japan
- Jim Reid
- Markit
- Nikkei
- Recession
- Reuters
- SocGen
- Sovereign CDS
- United Kingdom
- Verizon
- Yen
The driftless overnight sessions are back. After the Nikkei soared by 3% following several days of declines, and the Shanghai Composite continued its downward ways despite Non-Manufacturing PMI prints for March which rose both per official and HSBC MarkIt data, Europe was unsure which way to go, especially with the EURUSD once more probing the 1.28 support level. The USDJPY was no help, and even with the BOJ meeting at which new governor Kuroda is finally expected to do something instead of only talking about it, imminent, has hardly seen the Yen budge and provide the expected carry-funding boost to global risk. In terms of newsflow there was little of it: European CPI in March printed at 1.7%, above expectations of 1.6%, but below February's 1.8% rise in inflation. UK continued telegraphing the inevitability of Mark Carney's imminent QE, with construction PMI the latest indicator missing, at 47.2, below expectations of 48.0 (above 46.8 last).
In Cyprus news, the International Monetary Fund said it will contribute 1 billion euros over three years to the €10 billion bailout for Cyprus. Lagarde said she expected the IMF board to approve the funds in early May. "A staff team of the International Monetary Fund has reached staff level agreement with the Cypriot authorities on an economic program that will be supported by the IMF jointly with the European Union and the European Central Bank," Lagarde said. "A combined financing package of 10 billion euros is designed to help Cyprus cover its financing needs, including to service debt obligations, while it implements the policies needed to restore the health of the economy and regain access to capital market financing," she said.
Concurrently, Cyprus's central bank unfroze 10% of deposits over €100,000 at Bank of Cyprus PCL to allow business and individuals access to some of their savings, moving to gradually ease controls put in place to stem capital flight during the island's banking crisis. It is unclear how much of this money depositors actually have access to in light of the ongoing capital controls and cash withdrawal limitations.
Elsewhere, Spanish Prime Minister Mariano Rajoy on Wednesday called for Europe to implement growth policies to balance its austerity drive and for countries with room for fiscal manoeuvre to increase public spending. "Europe is the only region in the world in recession. To overcome this situation we need three things: every country needs to do its homework, we need more (European) integration and we need growth policies," Rajoy said in a televised speech to leaders of his People's Party. "That's why countries which can afford it should spend more." Rajoy also said the Spanish economy would clearly grow in 2014 while 2013 would remain tough.
Surely Europe will get right on it.
SocGen lists the main macro events to be on the lookout for today:
The apathy towards the gyrations in periphery spreads over bunds, 2y bono spreads tightened 20bp yesterday, is a testament to investors' lack of conviction and desire not to be exposed long or short before policy makers announce their decision and the next set of US employment data are released. A weaker non-manufacturing services ISM from the US is a risk today but a comparison of historical trends between manufacturing and non-manufacturing indices shows no striking co-movement at least where negative surprises are concerned. With the exception perhaps of June 2012, declines in the manufacturing ISM of 3.5pts and 5.9pts respectively in July and May 2011 did not translate into major setbacks for the services ISM equivalent. This does not tell us how the market will set up for Thursday, but we guess that investors will not be inclined to nail their colours to the ISM or ADP mast until the suspense of the Kuroda and Draghi press conferences are behind us. Providing a hint of what the BoJ might announce, Kuroda said recently that he will consider combining monthly asset purchases and an asset purchase fund, as well as buying debt with longer maturities. Break-even inflation in Japan rose some 60bp on a 6y horizon between December and March but has started to flat line since the middle of last month when Kuroda was appointed. Although the government has now raised the economic outlook for the last three months in succession, the latest quarterly Tankan survey showed lingering pessimism and planned cutbacks in investment, with USD/JPY averaging 85.0 through FY 2013. Can the BoJ lead companies to expect higher USD/JPY? What does the Kuroda BoJ put up against the $85bn per month of Fed purchases? The bank's current asset purchase target is ‘only' Y101trn by end-2013.
Finally, the full overnight recap comes as usual from Deutsche's Jim Reid:
Sometimes first and last days of a month and/or quarters can exhibit strange trading tendencies and yesterday felt like one of those days. Europe was particularly strong with the DAX, CAC, FTSE MIB and IBEX up 1.91%, 1.98%, 1.41% and 1.65% respectively. 10 year Italian and Spanish yields also fell 14bp and 12bp respectively. This was all in spite of worrying signs from the manufacturing PMIs for March where Italy (44.5 vs 45.3 expected) and Spain disappointed (44.2 vs 46.2). The UK (48.3 vs 48.7) also disappointed with the core Euro-zone numbers coming in broadly in line with expectation which had been pushed down due to the disappointing flash readings 10 or so days ago. France remained weak (44.0 vs 43.9) and Germany (49.0 vs 48.9) dipped back below 50 but is the only one of the four major Eurozone economies to be above the start of the year levels for this PMI series.
Back to yesterday and equity markets recorded solid gains on both sides of the Atlantic. The S&P 500 (+0.52%) closed at a new record high of 1570.25. US dataflow was decent with US factory orders (+3.0% v +2.9%) rising above expectations with the highest in print in five months. Orders for autos and aircraft boosted the February number which perhaps helped offset some concerns following Monday’s disappointing ISM manufacturing. Elsewhere the IBD/TIPP Economic Optimism index (46.2 v 45.5) also printed above market consensus. Besides economic data the Fedspeak yesterday was also dovish signaling further support for continuation of asset purchases. In particular, Atlanta Fed’s Dennis Lockhart noted that a slowing of Fed asset purchases potentially as late as early 2014 maybe needed to support the labour market.
On the micro front, reports that AT&T and Verizon may jointly bid for Vodafone Group Plc also helped lift equity market performance on both sides of the pond. Credit markets followed suit with spreads tighter across the board yesterday led by a sharp outperformance in European Financials. The European Financial Snr and Sub indices rallied 10bp and 15bp, respectively. As we showed last week, financials were trading at all times wides vs Crossover on a ratio basis just before Easter so any period of calm will likely favour them at the moment.
Elsewhere in credit we saw the European iTraxx Main, Xover and the CDX IG closing -5bp, -17bp and -2.5bp tighter on the day. FINRA Trace data showed that dealers were net sellers of cash bonds yesterday. Turning to Asia, the escalating tensions between North and South Korea continue to dominate market headlines overnight. The KRW dropped to a sixmonth low against the Greenback after the latest news that South Korean workers were refused access to an industrial park (Gaeseong zone) jointly run between the two countries for the first time since 2009. Demand for South Korean assets has taken a backseat ever since North Korea’s ‘state of declaration’ over the weekend and its decision to restart the Yongbyon nuclear site, which was shut down by the February 2007 disarmament accord. Korea’s 5-year sovereign CDS has come off its recent wides but still about 5bp wider on the week. Geopolitical tensions aside the latest non-manufacturing PMI data from China was better, coming at 55.6 in March from 54.5 in February.
Japanese equities are taking the lead as far as overnight markets are concerned with the Nikkei up strongly ahead of Bank of Japan meeting headlines.
Meanwhile its also worth mentioning that Gold had its largest drop in six weeks yesterday, down by 1.5% to test its February $1570/oz lows. Back to European news flow, according to Slovenian central bank head and ECB governing council member Marko Kranjec, savers have not been pulling out deposits from Slovenian banks. “The way the situation in Cyprus was being solved did not influence the confidence of our depositors" added Kranjec. According to Reuters Slovenian banks reportedly have around EUR7bn of bad loans, equivalent to 20% of GDP.
Looking forward we have an interesting ECB meeting coming up tomorrow and the market is starting to ponder what Draghi may say at his usual press conference. All eyes will be on his economic outlook but also more importantly on his thoughts on Cyprus and/or any mention of other unconventional policy options. Given how disappointing the data has been, markets are hoping for something from Draghi tomorrow.
Ahead of Payrolls Friday, the ADP employment report and the ISM manufacturing data in the US are today’s notable releases. In Europe we will get Eurozone CPI estimates for the month of March. In terms of the Fed Bullard and Williams will speak at some point later this evening.
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