Thursday, February 23, 2012

Economic Summary for the week ending 23rd Feb 2012

Greece - Eurozone finance ministers agreed a second bailout for Greece this week. Greece is to receive loans worth more than EUR130bn (USD170bn).
In return, Greece will undertake to reduce its debts to 120.5percent of its GDP by 2020 and accept an "enhanced and permanent" presence of E.U. monitors to oversee economic management.
Greece needs the funds to avoid bankruptcy on 20 March, when maturing loans must be repaid. After five straight years of recession, Greece's debt currently amounts to more than 160percent of its GDP.
Europe - Meanwhile, however, the eurozone's economy is heading into its second recession in just three years, while the wider E.U. will stagnate, an E.U. executive said on Thursday, warning that the area has yet to break its vicious cycle of debt.
Economic output in the 17 nations sharing the euro will contract 0.3percent this year, the European Commission said a report, reversing an earlier forecast of 0.5percent growth in 2012. The wider, 27-nation European Union, which generates a fifth of global output, will not manage any growth this year, the Commission forecast.
"The E.U. is set to experience stagnating GDP this year, and the euro area will undergo a mild recession," the Commission said in its interim forecast report.
Germany - German business confidence rose more than economists forecast to a seven-month high in February as progress in taming Europe's debt crisis tempered the risk of a recession.
The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, climbed to 109.6 from 108.3 in January. That's the fourth straight gain and the highest reading since July. Italian consumer confidence also rose more than forecast, a report showed on Thursday.
China - China's central bank has cut the amount of money banks must keep in reserve, in an effort to boost lending and sustain economic growth.
The reserve requirements will fall by half a percentage point from 24 February, the People's Bank of China (PBOC) said. Analysts said this could add as much as CNY400bn (USD63.5bn) to the financial system.
The Chinese economy is showing signs of slowing, as Europe's debt crisis damages Chinese exports.
Japan - Standard & Poor's (S&P) has maintained Japan's AA- long-term sovereign credit rating but warns that the country's outlook remains negative.
The ratings agency says the country's rating is "supported by the country's ample net external asset position, relatively strong financial system, and diversified economy".
It also cites the yen's status as a key international reserve currency as a support for its sovereign rating.
"However, Japan's sovereign ratings are constrained by the government's weak policy foundations, large fiscal deficits, and high debt, as well as prolonged deflation and an aging and shrinking workforce," S&P adds.
U.S. - Profits in the Standard & Poor's 500 Index are rising faster than its price, leaving the gauge 9percent cheaper than it was in April 2011, even though U.S. equities climbed within 6 points of last year's peak.
Corporate profits have topped analyst estimates for 12 straight quarters. Analysts that cover companies in the S&P 500 project earnings will rise this year to USD104.27 per share, the highest level ever, according to data compiled by Bloomberg. That would represent a 69percent increase in earnings since 2009, compared with the 22percent rally in the index in the past two years.
"The powerful recovery in earnings thus far has allowed market averages to rise without pushing the P/E ('Price-to-earnings ratio': a measure of the price paid for a share relative to the profit earnt per share) higher," said David Joy, the Boston-based chief market strategist at Ameriprise Financial Inc, who oversees USD600bn in investment. "Many investors are either not convinced that this price rally and earnings recovery are for real, or they simply do not care, having been burned too badly in the downturn."
Commodities - The price of oil has reached its highest level since May last year as concerns mount over Iran's nuclear programme.
Benchmark crude oil rose by USD1.67 to USD105.27 a barrel and Brent crude futures rose 44 cents to USD120.49 on Wednesday, marking the second day in a row of rises after Iran announced oil export bans on the U.K. and France on Sunday.
The E.U. banned Iran's oil imports from 1 July over fears that it is developing nuclear weapons. The E.U. wants to stem Iran's oil revenues as part of sanctions which will restrict its ambitions to develop a nuclear capability.
Spotlight on: what the latest Greek deal means for its private investors
Whilst most of the news headlines this week have been focussed on an agreement being reached between Greece and its public creditors (namely the European Central Bank and International Monetary Fund), it is the country's private investor creditors that have suffered the most.
However, as important as it has been to reach a conclusion of the long running Greek debt issue, it is the distinct differences in the way in which public and private creditors are to be treated that is causing some commentators to worry about the long term effect this may have on the availability of private investment in the future, something that cannot afford to be compromised at a time when governments around the world are at their most desperate to attract inward investment.
Under the agreement of the Private Sector Involvement Procedure (PSIP), it is likely that the public sector will not suffer any loss on the basis that they are prepared to provide further finance to Greece at some point in the future. Furthermore, and most importantly, a clear precedent has been set should other eurozone countries (or indeed Greece, again) find themselves in a similar situation in the future, hardly encouraging news for private investors that would normally take on government debt.
Under the agreement, private investors could lose as much as 60percent on the EUR206bn of Greek debt that they own, collectively.
If agreed, the PSIP would present private investors with new bonds with a face value that is half that of the existing bonds. The new bonds would have a longer maturity and pay an average interest rate of less than 4percent (compared with an estimated 5percent on the existing bonds).
The painful alternative to private investors, however, is that without the deal, which would reduce Greece's debt load by at least EUR120bn, the private investors' bonds would likely become worthless. Many of these investors also hold debt from other eurozone countries, which would also lose value in the event of a Greek default.
The agreement taking shape is a key step before Greece can get a second, EUR130bn bailout from its European Union partners and the International Monetary Fund, although there are other issues involved before Greece can get that aid. The EU and the IMF signed off on a EUR110bn aid package for Greece in May 2010, most of which has already been disbursed.
Greece faces a EUR14.5bn bond repayment on March 20, which it cannot afford without additional help.
Private investors hold roughly two-thirds of Greece's debt, which has reached an unsustainable level, almost 200 per cent of the country's economic output. By restructuring the debt held by private investors, Greece and its EU partners are hoping to bring that ratio closer to 120 per cent by the end of this decade.
In return for the first bailout, Greece's public creditors, the International Monetary Fund, the European Union and the European Central Bank, have unprecedented powers over Greek spending. However, austerity alone will not fix Greece's problem. The country must also find ways boost its economic output, which at the moment is shrinking.
If a debt-exchange deal wasn't reached with private creditors and Greece was forced to default, the contagion fears it would very likely hit Europe's, and possibly the world's, financial markets.
It is the view of some, however, that the issue with the PSI procedure is that it does not reward public and private investors accordingly. The PSI precedent means that in the future, should a government debt crisis occur, private investors will be less willing to support troubled government debt, and speculators will be rewarded for being 'short' (i.e. betting against similar bonds).
Obviously this will impact the sustainability of government finances at precisely the time they would be seeking to generate confidence in their ability to service their debt obligations.

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