Monthly Archives: June 2011

No Dive for Denmark

Europe: Top Marks for Denmark

In an editorial by Allister Heath in City AM wrote in a recent editorial, that, perhaps somewhat surprisingly (or extremely actually damn right shocking), it seems that today, Denmark has become “Europe’s pioneering financial reformer.” This, Heath believes, comes with an important financial message for those who want to become more in-the-know otherwise there could be real trouble as is already happening a bit. First, small lender Fjordbank Mors has gone bust and its senior bondholders are being hit bad with shareholders losing everything left and right and management out on their ears. It seems like none of this is impacting the taxpayer though; good news for them, bad for the money lenders.

New Denmark Laws

So why is this happening? Well, first it’s important to note that it’s not the first occurrence; according to Heath, its’ the second time following the country’s “new resolution procedures designed to allow an orderly, controlled failure of banks and thus reintroduce profit and loss discipline into the industry.” Heath has been arguing for this to happen globally for years. What’s new now is that bank bondholders across Europe are no longer getting government protection (finally, since that was kind of crazy). It became very easy to get a bank debt since there were no risks involved which ultimately enabled “shareholders to borrow cheaply and hence to enjoy an implicit subsidy.” In addition, it was found that credit providers could care less about banks’ risk taking. But it looks like this situation is finally changing. Now, only there will only be protection for the first £85,000 that’s deposited in a UK bank; more than that will be lost.

Dissenting Danish Bankers

It’s not so great for Danish bankers though who are now whining about the fact that their financial expenses have substantially increased simultaneous to credit rating agencies “assuming a larger risk premium.” But okay, it’s not the end of the world; it’s time this issue was faced in a realistic way without relying on government guarantees. Heath believes that this should ultimately result in a “better allocation of resources, a more rationally managed financial sector and correctly priced credit, reducing the risk of bubbles.” There has probably been “too little capitalism, not too much” and thus there is a need for reforms to be made to make sure that even the bigger banks “can be weaned from state guarantees and subsidies.” As Heath concludes, should this happen, it “will be great news for the City’s long-term prospects if the Danish experiment succeeds.”

Italy’s Got Wham’s Jitterbug

Instability in Italy’s Investments: Blame Game Greece

They say that George Michael of Wham! fame had some Italian in him…or was it Greek? No matter since both countries seem to be in on this latest financial debacle. And that might not be so far from what’s happening with the Italian financial markets as of late. Just last week, according to an article in The News, there were warnings in the capital of “possible downgrades by ratings agencies and amid fears of contagion from Greece’s sovereign debt crisis. Banking shares plummeted perhaps in response to rumors of “an imminent downgrade of Italy’s sovereign rating” and the “spread between Italian and German 10-year-bonds peaked to the highest since the establishment of the Euro.

Italy Take Cover

One analyst pointed out that the impact the Greek crisis is having on other countries has already been affecting markets for quite a few days and now it’s clear that “Italy is in the line of fire.” UniCredit shares – the country’s biggest bank – has plummeted too. Indeed, it dropped a substantial amount – over 8 percent – mid-trading “before recovering somewhat to close down 5.54 percent.” Others impacted in a similar way included: “Banca Popolare di Milano, Banca Monte dei Paschi di Siena, Intesa Sanpaolo and Mediobanca.” Indeed, there were even whispers about some of the country’s banks possibly failing the European banking system’s “stress tests.” Trading in Milan had been termed “schizophrenic” amid a “panic” situation and the action was termed a “midday of fire.” Things certainly have looked better for Italy and its markets.

Vile Volatility

So why all this volatility? What’s happening with the instability? It has been said that the recent announcement in Brussels of Jean-Claude Trichet’s replacement as European Central Bank head of Mario Draghi this coming November, could have been a catalyst. They don’t want to see Draghi go; he is well-known for how he handled the financial crisis in Italy, rendering its banking system “relatively unscathed.”

But in an effort to quiet the panic, Silvo Berlusconi (the country’s PM) warned that “locusts of speculation were waiting to attack Italy on financial markets at the first sign of weakness and urged unity within his embattled government.” But he himself isn’t exactly flavor of the month, having gone through quite a few local electoral defeats in the last month. But he is still determined to protect his country financially, and promised that they will “avoid ending up like other European countries that are being bled to survive.” Only time will tell if Berlusconi can keep his promise and come to his country’s aid.

Wall Street Wash

Last Friday, for a third consecutive day, Wall Street plummeted. According to a Reuters report by Edward Kurdy, this was due to “worries about the Italian banking sector and Greece's debt crisis.” Despite this, the S&P 600 still had its “200-day moving average in a sign buyers still see value.” Still, all was not smiles for the S&P as its 500 dropped “for the seventh week in the last eighth,” down 7 percent “from its 2011 closing high at the end of April.” Yet it still stayed “within striking distance of its 200-day moving average.” This line has been tested twice in recent trading. So far though, it’s been a “springboard for stocks.”

Greeks

Problems are abounding with Greek’s government too, with investors fearing that it may not ultimately “pass an austerity plan next week,” due to an opposing electorate. This could result in its defaulting on its debt repayments. According to chief market strategist of ConvergEx Group, New York, Nicholas Colas, it seems that politicians don’t quite get the sensitivity of financial markets to such decisions. At some point there is concern of the political vote going against the market.

EuroZone Issues

Sharp drops were encountered at UniCredit SpA and Intesa Sanpaolo (Italy) with increasing worried about the banks’ capital positions. There was a brief suspension in the trading of these shares too. Other plummets were seen with the Dow Jones Industrial Average that went down to 115.42 points as well as the Standard & Poor’s 500 Index which dropped 15.05 points. As well, the Nasdaq Composit Index lost 33.86 points. In addition, there was a drop in the Euro against the dollar for a “third straight session” fueled by concerns (again) of Greek’s parliament not following up with its intended austerity measures.

So it seems that only time will tell what will happen with currencies and trading. A lot is going to depend on political moves – especially vis-à-vis the Greek government – in the next few weeks.

The Return of the Millionaire

Global Financial Crisis Ending

It seems like the global financial crisis is coming to an end finally. The count of millionaires is increasing once more. According to the World Wealth Report, levels last year increased by 8.3 percent to 10.9m and America seems to home to a lot of these, ranking one percent of the population. According to the study by Merrill Lynch Global Wealth Management, female millionaires have gone up from 24 percent to 27 percent in the last three years. It was a good idea the way investors behaved, by “moving away from cash holdings and deposits into riskier equities.” According to head of US Wealth management for Merrill Lynch Global Wealth Management, John Thiel, this really “paid off.” As well, confidence in the market has really “picked up” during this time frame.

Good Times Ahead

The study interviewed 23 brokerages around the world. They “predicted that interest in equities would continue to rise while reliance on real estate to build wealth would fall.” In terms of placement, more than half of the world’s millionaires are living in America, Japan and Germany. There have of course been events such as the Japanese earthquake which have had an impact on people’s wealth and the worldwide financial crisis but in a sense this has helped the growth of this one specific (very wealthy) group. Indeed, for those who are really rich – the ultra-high-net-worth individuals (those netting more than $30m), their growth escalation was more than 10.2 percent.

Greece’s Debt Crisis

Greece Causes Problems for Eurozone

In a recent article, it was reported that Didier Reynders, Belgian’s Finance Minister, feels that Greece’s debt crisis is so bad that it could actually spread “as far as France.” He said that should Greece be the “first country to default,” people will start looking towards places like “Ireland, Portugal, Spain, Italy, maybe Belgium but also France, given its deficit and debt levels.” As it is, the European Union and the International Monetary Fund (IMF) have already had to bail out Ireland, Portugal and Greece. It now looks like Belgium, Italy and Spain may be next on the list.

Crisis Conversations

At the time Reynders was talking, crisis talks were taking place by Eurozone ministers in an attempt “to avoid an imminent Greek default, is the first EU official to include France in the danger group.” Reynders also claimed Europeans should partly take the blame for the situation since they permitted Greece to enter the Eurozone in 2001 with the knowledge that “Athens had cheated on its public accounts.” As well, the Greece crisis impacted oil prices which dropped to almost a four-month low last Friday in New York while investors were concerned about the impact of Greece’s debt crisis on the world economy. As reported in an article in The Pakistan Times, this week the NY benchmark contract shed over $6 in “seesaw trade that saw a loss of over $4 Wednesday and a tiny gain on Thursday.”

Ireland and Financial Stability

Financial stability can trace back a long way, according to an article today in the Irish Times. Indeed, the September 2008 unilateral bank guarantee from Ireland was, according to EU commissioner Joaquin Alumnia, what “trigger[ed] subsequent EU-level actions to preserve Continent-wide financial stability.”

Alumnia’s Criticisms

Alumnia was addressing a group of bankers yesterday in Dublin in which he reiterated the criticisms he’d made earlier in the week about the guarantee, claiming it had reduced “the margin for maneuver to seek burden-sharing from senior bondholders.” He also said that for the most part, the EU countries have been engaging in some great team work vis-à-vis the crisis. However Alumnia wasn’t so impressed with the behavior of the country’s banks and made no bones about this fact saying that it was their “careless lending to the commercial real estate factor” that had created the country’s “financial woes.” Further, he believes that the country’s economy requires “smaller, more robust and more prudent institutions” and that banking sectors must be prevented from becoming “disproportionate” vis-à-vis the economies in which they work. As well, the state regulator needs to be better at identifying risk in “traditional lending,” as that has significantly contributed to the crisis. Getting Out of Crisis Thus the advice for the future is to establish two pillar banks to set up a “de facto duopoly.” Along with EU authorities, the Irish need to try and ensure consumers benefit from competition. Further, in the last three years governments from the 27-member bloc have given financial institutions €2,000bn which Alumnia thought was “staggering.” The EU’s largest bank bailout has gone to Ireland, at a crazy high figure of 33 percent of GDP. The Netherlands at number 2, is significantly behind at 6.6 percent of GDP.

Greece and Europe’s Crisis

Violence Emerges in Athens

In an article by Louise Armitstead, it seems that Europe’s debt crisis is getting out of control in more than just financial ways. Just two days ago the Athens parliament was subject to a violent outburst while the capital’s politicians discussed “savage spending cuts.” The people outside were less than happy, resulting in “strikes, street fights and angry demonstrations.”

It certainly didn’t go unnoticed as shortly after, the country’s PM George Papandreou, offered his resignation. But this also could have been due to the fact that he had earlier pledged to deal with his country’s €340bn (£298bn) debt within the Eurozone. But Papandreou’s offer only met with “alarm across Europe.”

France and Germany at Loggerheads

Increasing tension between Europe’s “two key peacemakers,” France and Germany, is another subject being observed. It seems like the two cannot reach an agreement on “how to prevent the Eurozone's first ever default.” France is hoping Greece will “stick to the terms of its debt repayments, even if it means deeper cuts and asset sales at home,” a view also held by the European Central Bank (ECB). However, Germany’s Finance Minister, Wolfgang Schauble feels “bondholders should share some of the costs of the bail-out,” with debt maturities being lengthened for seven years. France gleaned the support of Belgium and Spain. At the end of the day though, irrespective of whatever in-fighting is going on, there seems to be no argument on the fact that “the future of the Euro and the Eurozone are at stake.”

Canada’s Complications: Economy Issues

Canadian Job Market

Earlier this week, the parliamentary budget watchdog in Canada said that the “job reductions within the bureaucracy, as presently planned, won't be enough to meet austerity targets the Conservative government has established.” Budgetary plans for next year and the future were also reviewed. It was found that by fiscal 2014 an anticipated shrinkage for payrolls is expected by 6,000 positions, to 365,000. However this reduction isn’t even expected to solve all matters since it is anticipated that it will only generate “just one-third of an annual C$1.8bn (US$1.83bn) in savings the government booked in its 2010 budget.”

Government Spending Plans

At the same time it seems that expenditure on fiscal for next year is likely to escalate C$1.7bn. Meanwhile, spending plans introduced by individual government departments and agencies indicate outlays on personnel in fiscal 2012 is set to increase C$1.7bn to over C$38bn.

As Kevin Page wrote in his report, “given the apparent difference in direction between the freeze targets established in Budget 2010 and [spending plans], parliamentarians may wish to seek additional information from the government on the strategy and plans to achieve the operational savings along with implications by department.” The way Page reached this conclusion was through a review of “spending estimates outlined by individual departments.”

Canada’s Budget in the Past

In the past, Canada’s budget has also responded to climate changes. For example, last year, it focused on being somewhat earnest, implementing budgetary freezes and growth caps on defense expenditure that looked set to “extract C$17.5 billion in savings over a five year period.” The 2011 budget that was re-introduced last week saw a pledge of C$4-billion additional cuts per year to “ensure Canada, a Group of Seven economy, returns to budget balance in fiscal 2015, or a year earlier than originally projected.”

Financial Femme Fatale?

If Christine Lagarde – who was yesterday put on the shortlist to head the International Monetary Fund – succeeds, she will be “the first woman to head the global emergency lender.” She has a pretty good chance too, in the way she has been handling the world economic crisis until now. Once Dominique Strauss-Kahn handed in his resignation last month, this put Lagarde as “the odds on favourite.” Kenneth Rogoff, ex-chief IMF, claims Lagarde’s popularity has rendered her to be “treated practically like a rock star.”

Lagarde’s Impressive Resume

It seems that Lagarde has a pretty good shot at attaining this position. She has already broken records having served as her country’s finance minister since 2007, rendering it the longest stretch in history. As well, her work during the 2008 world financial crisis, and fluent English and French in her position as head of Eurozone finance ministers, will stand her in good stead. Since her country has been head of the G20 group of the largest economies in the world, Lagarde “has been the point woman on efforts to combat the effects of the crisis and reform the global financial system.” Through her work in the crisis, she set up great relations between her counterparts throughout the world’s major capitals as well.

Lagarde’s Lapses

Of course, just like for any head honcho, it hasn’t been completely smooth at the top for Lagarde. While on the one hand she was complimented for much of her work, on the other hand she was criticized for her stubbornness. As well, when she attacked her country’s labour laws as being “complicated, too heavy, and responsible for freezing job growth,” she wasn’t exactly given a standing ovation. Her weak solution for increasing petrol prices was for the French to get on their bikes. Still, everyone has lapses in judgment and at the end of the day, these issues might be seen as just that, putting Lagarde back at the forefront for a very good chance of landing this high-profile position.

US Economy’s Impact on Global Finances

World Bank economist Andrew Burns commented on America’s recent weak economic data, noting a significant slowing down of US economic growth. However he said that it was unlikely that the US would experience a “double-dip recession.” In terms of Europe, the recovery is somewhat stalling also vis-à-vis various crises in different areas, most notably Ireland and Greece.

World Bank Forecast

The World Bank is predicting that developing countries however, will encounter pretty solid growth which is good news. But what isn’t such great news is that with the likely increase in food and fuel prices, this will cause other economic backlashes. At the beginning of the year the World Bank was concerned about emerging economies receiving an excess in private capital. Today, this is less of a worry. At a news conference Burns said: “those strong, short-term capital inflows that dominated our concerns have eased substantially.” A tightening of fiscal and monetary policy had also reduced some of the pressures adding that “our baseline forecast is one where there is a smooth landing, a smooth resolution of those pressures but they are still there.”

Potential Political Problems

The Middle East and North Africa are likely to have a serious impacted on global growth if their political problems are not sorted out. This would result in a reduction of economic output by approximately 0.5 percentage points. Middle Eastern problems have really worsened since the beginning of 2011, at least vis-à-vis world economic growth. This was most notable in Egypt and Tunisia, followed by Bahrain, Jordan, Morocco, Saudi Arabia and Syria at the time that NATO maintained its Libyan bombing campaign. In addition, such unrest, according to the World Bank, could result in a world oil price increase of up to $200 a barrel. In addition, this will have a domino effect on global food prices, which is a mere three years after the last food price crisis.