EUCOM Economic Analysis - Part I

[Firn]

@Surferbeetle: I will come back to Repsol later, I had busy weeks and did not try to think too much about it

Textbook economics and standard models have mostly proven indeed their worth, but using the lessons learned seems to be indeed quite difficult. Like everything, not just investment, doing things properly is the hard part.

About the foreign investment, it all depends how it is financed and how well the capital is put to work. Buying toxic paper derived from financially engineered mortages was not smart from the foreign creditors but building too expensive houses in excess was neither for the debitors.

As Fuchs said the US arguably does consume too much however as long the rest of the world is happy with the paper, green or toxic it gets for their goods allmost all is fine. It is more problematic, too put it in Buffets words, when part of the farm land, the national capital stock is sold to consume. In the latter case a big thanks for the American consumer who buys European products, at least you are doing your bit to help us.

P.S: The economic rise of South Korea has been indeed amazing especially compared to Argentina, who was once ahead of most European countries...

@Fuchs: The rise of the capital income share was more dramatic in the US. While I do have some ideas about the reasons (taxes!, ...) I wonder if this topic is well researched. Perhaps I will later give a closer look.

----

The Greek election was certainly an outcry of the people, sadly it is hard to imagine a working government after those results. It is indeed a bit of late interwar feeling, with the extreme right and the extreme left gaining and the relative moderates falling.

P.S: How a Greek party can in Greece, who suffered greatly under Nazi Germany, use some of those symbols and that rethoric is beyond believe.

[Firn]

Guaridan €-crisis live ticker

10.52am: The UK has sold €2bn of 30-year gilts at lower borrowing costs, showing that the eurozone crisis has not dampened demand for British debt.

The yield on the sale dropped to 3.224% (from 3.341%). That has sent gilts rallying in the general bond market, with prices hitting record high levels.

10.29am: Germany has succeeded in selling new five year bonds at a record low interest rate, but didn't manage to sell as much as hoped.

The Bundesbank sold €4bn of bonds maturing in April 2017 at a yield of just 0.56%, down from 0.8% at the last auction of five-year debt. Such a low cost of borrowing shows that buyers were prioritising safety over rate of return.

P.S: The capital flight from Greece in those last two years looks really bad. Greece clearly needs foreign capital badly but who wants to lend if he hardly can hope to get it back? Only the IMF and the EU can step in but is the political will still there to overcome the internal and external hurdles?

Austrian T-bond yields at an all-time low

Bei der Aufstockung einer fünfjährigen Anleihe im Ausmaß von 600 Mio. Euro lag die Rendite bei 1,408 Prozent. Bei der Aufstockung einer zehnjährigen Emission in Höhe von 500 Mio. Euro waren es 2,634 Prozent. „Beide Zinssätze sind Alltime-Lows“, sagte Martha Oberndorfer, Geschäftsführerin der Bundesfinanzierungsagentur (ÖBFA) am Dienstag.

Inländische Banken kamen diesmal nicht zum Zug. Beide Aufstockungen gingen zu 100 Prozent an ausländische Banken. Das sei sehr selten, so Oberndorfer. Ausschlaggebend für die Zuteilung sei allein die Höhe der Gebote. „Der Emittent steuert das nicht.“

Despite having lost the AAA rating from the American rating club 100% of the debt was picked up for a yield of just 1.4% by foreign banks....

The paths of the European T-bond yields has first almost united due to the Euro but since a couple of years they truly spread out

[tequila]

German voters reject austerity in key poll

Angela Merkel’s centre-right Christian Democratic Union suffered a bruising defeat on Sunday night in regional elections in North Rhine-Westphalia, Germany’s most populous state, when the centre-left opposition of Social Democrats and Greens won a clear majority.

The vote for the CDU slumped to just 26 per cent from 35 per cent in 2010, according to the first exit polls. The result was by far its worst in the state in the post-war period.

The outcome will be seen as a rejection by voters of the strict austerity policy promoted by the CDU at both local and national level, and a boost for the opposition.

[Fuchs]

Their lead candidate for the office of Ministerprsident (head of state & government in the state, kind of prime minister) was (is) a dud.

He was even stupid enough to regret live and on tape that the voters can decide who's going to rule.
http://www.lachschon.de/item/132181-ImmerdieseWaehler/

[Firn]

I agree with Fuchs. The outcome will weaken Merkel and the CDU but it was not a vote against austerity.

Hannelore Kraft -Triumphatorin

Mit ihrer bodenstndigen Art hatte sie keine Schwierigkeiten gegen ihren Herausforderer Norbert Rttgen: Hannelore Kraft ist die triumphale Gewinnerin der Landtagswahl in Nordrhein-Westfalen. Sigmar Gabriel sieht sie schon als Kanzlerkandidatin.

Basically it was mostly down to the performance of the two regional party leaders.

[Fuchs]

There's no real austerity talking points wave in Germany anyway.


We added to the federal constitution an obligation to balance the budget which takes effect gradually.
Once the federal budget is stabilised at no net added debt per annum we can go on and address the revenue shortfall of the states. Their budget deficits is not so much a spending issue as it is a revenue issue. The same is even more obvious with the town and municipalities which suffer from having quite even duties to their inhabitants but very different income from businesses due to the move of many businesses to the small towns that border on larger ones. Another problem at this level is that many rural areas have a rather low economic activity, and often a lot of migration of young people to other regions.

In short: The German fiscal situation need a rearrangement that can realistically be done in a few years. The potential for reasonable austerity measures doesn't suffice to solve the various budget woes in Germany.

We could cut the budgets a bit, of course. Politicians like large projects which are often not cost-efficient, and bureaucrats have their multi-million pet projects, too. The budgets in trouble are far beyond the scale of such problems, though. Meanwhile, other budgets are in fine shape.

[Ulenspiegel]

"Sigmar Gabriel sieht sie schon als Kanzlerkandidatin."

OMG, she won because her competitor behaved like an idiot. Against Merkel she looks like Romney vs. Obama :-)

[Ulenspiegel]

There's no real austerity talking points wave in Germany anyway.


We added to the federal constitution an obligation to balance the budget which takes effect gradually.
Once the federal budget is stabilised at no net added debt per annum we can go on and address the revenue shortfall of the states. Their budget deficits is not so much a spending issue as it is a revenue issue. The same is even more obvious with the town and municipalities which suffer from having quite even duties to their inhabitants but very different income from businesses due to the move of many businesses to the small towns that border on larger ones. Another problem at this level is that many rural areas have a rather low economic activity, and often a lot of migration of young people to other regions.

In short: The German fiscal situation need a rearrangement that can realistically be done in a few years. The potential for reasonable austerity measures doesn't suffice to solve the various budget woes in Germany.

Fuchs, do you assume the problems of states and municipalities is simply a distribution problem and could be solved by changes of the equalization scheme of the states (Lnderfinanzausgleich) and be changes of the business tax?

[Fuchs]

Even services with uneven revenue opportunities simply does not work.
The even services are a constitutional mandate and this won't go.

The revenue system has to be adapted to the reality of the spending obligations.


(It wouldn't hurt if we had the same low interest rate for all, of course. That's not going to happen as long as the Greece issue lingers in the news, though.)

[Firn]

The guardian coverage is always a good read, with all the advantages and disadvantages of a live blog.

What strikes me, and has for some time, is the diametrical difference in perception within and around Germany when it comes to the power it yields. Externally a good many, media and people, think that Germany is able to make and break, leading the (wrong) way, while on the other hand internally the press and the commentators seem to believe that all the power Germany has is to foot the bill for others.

It is of course important to note that per capita other countries have a higher share of the various protection and rescue schemes.

[Fuchs]

Keep in mind 3/4 of Germany have been in a West-East transfer scheme for 22 years.

[Firn]

From the Guardian live blogging

11.27am: Looking back at Greece, Helena Smith reports that government officials are predicting today that Greece's GDP will have shrunk by almost a third over a five year period by the end of 2012.

That's even worse than the 20% slump that economists have been predicting.

Helena writes:

While the country's official statistics bureau announced on Tuesday that gross domestic product contracted by an annual rate of 6.2% in the first quarter of 2012 – better than the forecast estimate of 6.7% to 7.9% – Greek officials say by the end of the year the downward trajectory will have been dramatic.

"By the close of 2012 we estimate the economy to have shrunk by a total 27% since the start of the recession five years ago," said one official discounting the often-heard figure of 20%. "That's almost a third. It's completely unprecedented for an advanced western economy."

With Athens being asked to enact more austerity measures – including reducing the minimum wage by a further 22% - the process of aggressive internal devaluation would only get worse, the official said.

27% are more a quarter then a third, but it in any case a reduction unimaginable five years ago.

It seems that Greece is forced to cut but goes along the easier and faster paths. Cutting the minimum wage is easier then cutting the pay of relative good earning state and near-state employees or getting the taxes collected.
In the short run all this austerity is of course devastating. Consumption and investment are falling due the enduring demand shock, the banks are dried out of money with more and more people shifting their euros to their matresses.

While I'm more of a creditor then a debitor I would wish that the ECB would become even more aggressive, also raising the inflation target to at least 3.5%

A cyinical person might actually be glad that with Greece bleeds at least just a small country on the periphery. It's pain is not that much of a threat of the stability of the EU and it serves as a kind of guinea pig for much more important countries like Italy and Spain.

@Fuchs: I guess this is one of reasons. Another big might be the way especially Greece is [partly rightly] perceived. The tragedy is of course that such a crises hits all, mostly the weak and not just those who cheated.

[Fuchs]

27% are more a quarter then a third, but it in any case a reduction unimaginable five years ago.

It depends.
"Natural GDP" or "Potential GDP" is a better benchmark than an arbitrary date for comparison:

http://www.tradingeconomics.com/gree...-imf-data.html


They fell back a lot to normal and then a bit below normal. Nothing outrageous, except that the Greeks got used to the unusually high level of the partially foreign-financed years of 2001-2008.

[Firn]

True enough I had not the numbers and the "natural "GDP seems to have been indeed a lot higher then Yp, the Potential output ("potential GDP").

High consumption due to easy credit and increasing debt on the private and the state level have pushed it above it. The crisis has destroyed a great deal of demand, now it should be fairly low compared to Yp, no wonder with all that production factors going to waste...

Monetary and fiscal policy should have kicked in many years ago to keep the bubbles and the budget in check now the demand must get supported.

P.S: I have written about the Greek banks running dry, now the ECB seems to have stepped in providing fresh credit.

9.30 The news that the EU has given its blessing to the release of €18bn in recapitalization funds for Greeks banks has been met with relief all round in Athens.

Greece's outgoing finance minister Filippos Sachinidis, attending last night's eurozone finance ministers' summit was told the long-awaited cash injection would be disbursed as early as today. And it is not as moment too late, say Greek officials and observers. "The banking system is in dire straits. This is very good news and shows that the EU is following through, it's acting on its promises and that in itself is an act of faith," Nikos Evangelatos, a prominent political commentator told radio listeners this morning.

With all the talk of a Greek exit from the 17-nation euro zone panic-stricken depositors have been rushing to withdraw savings from banks. Since Friday last, an estimated €1bn has been withdrawn from banks according to deeply concerned finance ministry officials. Recapitalisation of the Greek banking system – badly hit by their enforced participation in the country's unprecedented debt restructuring – is a major part of the second €130bn package of rescue loans agreed for Greece earlier this year by the EU, ECB and IMF, its 'troika' of creditors.

It is from the early morning, must have missed it before. However:

4.11pm: Speaking of the ECB, markets are coming under pressure again after this:

ECB STOPS MONETARY POLICY OPERATIONS TO SOME GREEK BANKS AS RECAPITALISATION NOT IN PLACE -CENBANK SOURCE

— Steve Collins (@TradeDesk_Steve) May 16, 2012

Earlier we reported that EU had given its blessing to the release of €18bn in recapitalization funds for Greeks banks. (9.30 am)

[Firn]

Fuchs rightly pointed out that I made a mistake, by writing "natural" GDP instead of real GDP, which I meant. Thanks for that.

The € is now falling against the other important currencies, and has lost quite a bit of his value in the last 3-4 years. Still there is not so much difference compared to ten years ago against the CNY and JPY, while it was a lot weaker against the pound and the dollar back then.

A weaker Euro would help the European economy, however it does of course not address the big interal differences in competivness.

[Surferbeetle]

Looks like some banks are stretching and thinking about going for a run. Average price to book ratios are ranging around 0.6 for European banks as compared to 1.3 for Asian banks.

Flight of Euros Accelerates, Adding to Greece’s Worries, By LIZ ALDERMAN and RACHEL DONADIO Published: May 16, 2012, NYT

Money has been fleeing Greece ever since the country’s debt crisis began more than two and a half years ago. But the outflow has picked up velocity since last week’s election, when the elevation of anti-austerity leftist parties in Parliament raised the specter in international financial markets of a Greek default. At a time when Greek’s banking system needs all the help it can get from the rest of Europe, its own depositors are making the banks weaker by the day.

An average of 4 billion euros, or $5.1 billion, has flowed out of Greece every month since 2009, when the European debt crisis first broke open.

President Karolos Papoulias seemed to stoke fears further on Tuesday when he revealed that 700 million euros had been taken out of Greek banks since the election. While several senior Greek banking executives said Wednesday that the money flow should not be characterized as a full-blown run on Greek banks, analysts said that the steady drawdown on deposits by consumers and companies could be expected to continue at least until new elections are held June 17, and possibly beyond.

Bankia pierde 2.400 millones en Bolsa desde la marcha de Rato, María Vega | Agencias | Madrid, Actualizado jueves 17/05/2012 13:03 horas, El Mundo

Los clientes han retirado en una semana más de 1.000 millones de euros

Por su parte, el secretario de Estado de Economía, Fernando Jiménez Latorre, ha negado que haya una salida de depósitos en Bankia y ha asegurado que el nuevo proyecto reúne todos los requisitos para ser un éxito de futuro.

En conferencia de prensa, Jiménez Latorre ha afirmado que hoy es una buena ocasión para transmitir a los depositantes de Bankia un mensaje de tranquilidad y ha reiterado que es un proyecto con un tamaño y un potencial extraordinario.

Only the ECB can make it a bank run: James Saft, By James Saft
Thu May 17, 2012 12:45pm IST, REUTERS

Greeks have been withdrawing hundreds of millions of euros of deposits from their banks in recent days, driven by a rational but dangerously self-reinforcing fear that a Greek exit from the euro will leave them holding far less valuable new drachma.

That fear, though, is predicated on a shaky notion: that the players in the drama will do what they have said they would.

Greek depositors are worried that their politicians will repudiate the terms of the bailout and that the ECB and European authorities will, ultimately, cut them off, either directly or by refusing to accept dubious collateral in exchange for fresh euros.

That would bring down the Greek banking system, or most of it, and force Greek authorities to impose capital controls. Cue Spanish, Italian and Portuguese depositors, who might follow suit and start to withdraw their own deposits, putting massive amounts of collateral into the hands of the ECB and their own central banks.

The betting on this one comes down to whether you think European officials will stick with their principles or act in their own best interests, always a legitimate and uncertain question. The ECB could, at any point it chooses, pull the plug on the Greek banking system by refusing to accept the sort of bad collateral now being offered. A prudent act, utterly within their rights and a highly destructive one.

P/B ratio, From Wikipedia, the free encyclopedia

The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company's book value to its current market price. The calculation can be performed in two ways, but the result should be the same each way. In the first way, the company's market capitalization can be divided by the company's total book value from its balance sheet. The second way, using per-share values, is to divide the company's current share price by the book value per share (i.e. its book value divided by the number of outstanding shares).

As with most ratios, it varies a fair amount by industry. Industries that require more infrastructure capital (for each dollar of profit) will usually trade at P/B ratios much lower than, for example, consulting firms. P/B ratios are commonly used to compare banks, because most assets and liabilities of banks are constantly valued at market values. A higher P/B ratio implies that investors expect management to create more value from a given set of assets, all else equal (and/or that the market value of the firm's assets is significantly higher than their accounting value). P/B ratios do not, however, directly provide any information on the ability of the firm to generate profits or cash for shareholders.

This ratio also gives some idea of whether an investor is paying too much for what would be left if the company went bankrupt immediately. For companies in distress, the book value is usually calculated without the intangible assets that would have no resale value. In such cases, P/B should also be calculated on a "diluted" basis, because stock options may well vest on sale of the company or change of control or firing of management.

[Firn]

I'm pretty sure that the firefighters from the ECB ready already the pumps and will turn on the money stream...

[Fuchs]

I dare to predict that Germany would drop the Euro if the ECB sustained 5% p.a. inflation for several years. Germany would also drop the Euro if the ECB creates a surprise inflation of 10% in one year.

Inflation aversion is a cultural trait in Germany. High inflation is considered as a highly visible marker of mismanagement, and this is a country that's obsessed about organising work and life well.

[Surferbeetle]

I'm pretty sure that the firefighters from the ECB ready already the pumps and will turn on the money stream...

In disaster there is sometimes opportunity, but it is of course a very dangerous play given the complexities involved...great power interests, national interests, popular discontent, lady luck, murphy, usw, usw.

Along these lines:

European stock rout led by Spain’s Bankia, Lender tumbles 14% on reports of funds being withdrawn, Europe Markets Archives | Email alerts, May 17, 2012, 9:23 a.m. EDT, MarketWatch

The French CAC 40 index FR:PX1 -1.20% fell 0.8% to 3,024.82, with Credit Agricole SA FR:ACA -3.51% down 3% and Société Générale SA FR:GLE -3.64% losing 3%.

The German DAX 30 index DX : DAX -1.18% fell 0.7% to 6,333.92, with Deutsche Bank AG DE : DBK -4.08% DB -0.91% down 2.5% and Allianz SE DE:ALV -2.81% dropping 1.5%.

The FTSE 100 index UK:UKX -1.24% fell 1.1% to 5,343.34, as Vodafone Group PLC VOD -1.72% UK:VOD -1.19% dropped 1.8%. The company’s Vodafone India Chief Executive Marten Pieters told reporters Thursday that Vodafone is planning to list its Indian venture on local markets soon, but didn’t give a date.

U.K. banks followed the Continent lower, with heavyweight HSBC Holdings PLC HBC -2.50% UK:HSBA -2.49% off 2%, and Standard Chartered PLC UK:STAN -3.41% down 2%. Energy stocks were also down with BP PLC BP -1.18% UK:BP -0.75% losing 1%, while Royal Dutch Shell PLC RDS.B -1.41% UK:RDSB -0.87% fell 1.3%.

http://www.centerforfinancialstabili...uro_051412.pdf

[Surferbeetle]

Greek Euro Exit Would Risk Asia Crisis-Style Rout, Zeti Says (Update 1), By Haslinda Amin and Elffie Chew - May 16, 2012 11:25 PM MT, Bloomberg News

A Greek exit from the euro could cause contagion comparable to the Asian financial crisis, according to Malaysia’s central bank Governor Zeti Akhtar Aziz, who had first-hand experience of that turmoil.

“The worst-case scenario is what we saw in Asia,” Zeti, 64, said in an interview with Bloomberg Television in Istanbul yesterday. “When one economy collapses, then the market usually moves on to focus on the next one, then there will be a contagion that will affect different countries that probably don’t deserve those kinds of consequences.”

European leaders are now openly talking about a possible Greek euro exit after attempts to form a ruling coalition in Athens broke down on May 15. The debt crisis in the region sent Spain’s 10-year bond to a five-month high of 6.5 percent yesterday and Italy’s 10-year bond yield rose to as much as 6 percent, the highest since Jan. 30.

“The consequences for that to happen I believe will be unimaginable for Europe, therefore a solution has to be found to address the situation,” Zeti said. “I believe that such a solution can be found.”

Zeti was assistant central bank governor responsible for economics, reserves management, money market and foreign exchange operations when Thailand devalued the baht on July 2, 1997. The ringgit fell 89 percent in the next six months as regional currencies plunged and investors fled the region, pushing Asian economies into recession and prompting Thailand, Indonesia and South Korea to turn to International Monetary Fund bailouts. It was Zeti who announced Malaysia’s capital controls in 1998 as acting governor, drawing the ire of the IMF.