Tuesday, March 8, 2011
Fitch: 60% Chance Of A Chinese Banking Crisis By 2013
Fitch: 60% Chance Of A Chinese Banking Crisis By 2013: "There's A 60% Chance Of A Chinese Banking Crisis By 2013"
Portuguese Debt Concerns Misdirected
BY GRANT DE GRAF
LISBON—Portugal has indicated its intent to operate within tight fiscal targets irrespective of the impact which high oil prices and raw materials may have on the economy, according to senior Portuguese officials.
"We have correction mechanisms that will allow us to meet the targets we have set," Mr. Teixeira dos Santos said at a Reuters-Radio TSF conference in Lisbon. "Whatever happens, we will not miss the budget targets we have established."
Investors are keeping a close eye on budget numbers being released by the country, which has pledged to cut this year's deficit to 4.6% of gross domestic product from about 7% last year. The deficit stood at 9.3% in 2009, raising fears that Portugal could default on its debt-repayment obligations.
If a disciplined approach towards fiscal policy is an ingredient towards recovery, then Portugal seems committed towards achieving that goal.
The government last year launched a series of austerity measures designed to shrink its expenditures and increase revenue, mostly through salary cuts in the public sector and tax increases.
The notion of extreme pressure on Portugal to seek an international bailout is unsubstantiated, despite reports to the contrary, amongst gossip mongers.
Mr. Teixeira dos Santos said at the conference that markets are "over-reacting" about the euro zone's capability to control its finances, although he criticized the bloc, saying it has been slow in tackling sovereign-debt problems that started with Greece.
It is still unclear as to whether Portugal's predicament is a direct consequence of the Greek and Irish Bailouts, or rather a function of a general downturn in demand for goods and services, and symptomatic of the severe economic recession.
"There is a deficiency in the euro. We don't have a common mechanism to control budgets and taxes in the euro zone," said Mr. Teixeira dos Santos. The difficulty of balancing a fiscal policy that is localized to specific regions within the EU, with a centralized monetary policy will continue to be a challenge for all countries within the EU.
Mr. Teixeira dos Santos also said he hopes the March 11 and 24 meetings of European Union leaders to discuss steps to tackle the region's debt crisis, will help stabilize the euro zone. He would be well advised to take advantage of the opportunity to seek a comprehensive loan package. This could be achieved with favorable terms and justifiable, irrespective of the absence of the emergency bailout conditions that were evident in Greece and Ireland.
Among the measures Portugal is backing for the meetings is an increase in the scope and lending capacity of the €440 billion ($605.13 billion) European Financial Stability Facility.
Although reports have indicated that a successful agreement among EU members is crucial for Portugal, this is unfounded. Given Portugal's paltry debt exposure relative to other EU countries, it is unlikely that a new agreement will have any impact on Portugal at all.
Further, critics have suggested that Portugal will be hard pressed to service high borrowing costs. Because the loans are marked in Euros and indirectly supported by the ECB, attributing higher interest rates to Portugal would seemingly be unfair. Alternatively, they should be viewed as an arbitrage opportunity in which investors achieve a higher rate of return, for a risk which might be attributable to the European Central Bank.
A more important consideration is the challenge of formulating a blueprint that will contribute towards the revival of Portugal's economy. With its major trading partner, Spain, floundering and potentially in a more catastrophic position than Portugal, this will be difficult.
Sources: http://online.wsj.com/article/SB10001424052748704615504576171884219508072.html
Monday, March 7, 2011
Is Portugal in the Green or Red?
By GRANT DE GRAF
[Adapted and sourced from an article in WSJ By CHARLES FORELLE]
BRUSSELS—Portugal had about €2 billion ($2.77 billion) in cash at the end of 2010, an official of the country's debt-management office said.
Fresh borrowing and other public transactions suggest Portugal has this year likely increased that number to around €4 billion. The official said in an email that the figure had risen but didn't elaborate.
The figure underscores the urgency of Portugal's predicament: On April 15, it must spend more than €4 billion to repay one of its long-term bonds. In all, Portugal needs a total of around €20 billion this year to repay bonds and to cover its government's persistent budget deficit.
Portugal's leaders have said repeatedly that they don't need a bailout, and that a program of economic reform and austerity the country has embarked upon will convince financial markets to lend it what it needs. Portugal has been able to issue both long- and short-term debt this year, albeit at high interest rates.
The relatively small amount of cash Portugal has on hand stands in contrast with Ireland, which has roughly similar borrowing needs this year. But Ireland had about €13 billion in cash in its main accounts heading into 2011, plus tens of billions more in a pension-reserve account that has acted as a rainy-day fund.
Still, Ireland's huge exposure to government-guaranteed banking liabilities forced it into a bailout last year. Greece, which took a bailout last spring, did so because it couldn't attract enough borrowing at reasonable rates to meet two large bond redemptions.
So far this year, Portugal has raised €5 billion from selling short-term Treasury bills and spent about €7 billion redeeming them. It has raised about €4.5 billion in long-term debt, after subtracting money spent on debt buybacks. The government ran a deficit of €282 million in January; February's figures aren't yet available.
It wasn't immediately clear what Portugal has taken in through other vehicles, like retail savings bonds or private placements.
In the long term, Portugal would be justified in converting its debt to a loan with more favorable terms provided, by the ECB. Portugal has been compelled to adopt severe austerity measures as a result of being part of the EU. Many may argue that this is the cost of being part of the EU. Alternatively, it has had to sell the viability of its economy to potential bondholders, who may view austerity as a positive.
http://online.wsj.com/article/SB10001424052748703752404576178434210328672.html
Viability of European Union Hinges on Flexibility
By GRANT DE GRAF
[Sourced and adapted from an article that appeared in the WSJ by LAURENCE NORMAN And PATRICK MCGROARTY]
BRUSSELS—The European Union's [EU] executive arm is keeping pressure on Germany and others to show flexibility in support for Ireland and Greece, ahead of crucial negotiations on the euro zone's future in coming days. EU consensus in supporting this stance will be a crucial test for the inherent strength of the union.
With leaders of the 17 nations that use the euro set to meet in Brussels next Friday to hammer out the basis of a "comprehensive package" of reform measures, Olli Rehn, the European Union Commissioner for Monetary and Economic Affairs, said Ireland and Greece must not be financially overburdened.
"I see a danger that we might overburden both countries with overly strict credit conditions," Mr. Rehn told Germany's Handelsblatt newspaper, distributed ahead of publication Monday.
He added that Greece's timeline to repay aid loans should be extended to seven years from 3½, the paper said. The EU commissioner appears keen to adopt a pragmatic approach towards the loans, rather than having to face the awkward position of a default, when the facilities become due.
Mr. Rehn has consistently called for the EU to consider easing the terms of the loans to Greece and Ireland, reiterating last week that the near-6% interest rates the Irish government must pay on its €67.5 billion ($94.4 billion) package should be debated.
A spokeswoman for Mr. Rehn had no immediate comment on the commissioner's remarks. Speculation would suggest that Greece may have procured the EU for adjustments in the terms of loans, as is anticipated to be the case with Ireland.
Mr. Rehn's latest comments come at a critical moment, with euro-zone leaders committing themselves to completing the reforms by a March 24-25 summit.
Sunday morning, the leaders of Ireland's Fine Gael and Labour parties agreed on a program for coalition government. Fine Gael leader Enda Kenny, who will almost certainly be voted prime minister when the Irish parliament meets Wednesday, and Labour leader Eamon Gilmore said they had settled outstanding issues, including a timetable for introducing more austerity budgets over the next four years.
The parties have been in talks for almost a week following elections dominated by Ireland's sovereign and financial crisis. Both parties campaigned on pledges to renegotiate parts of the debt plan, including lower interest rates on the loan. Fine Gael also said senior bondholders should take a hit as part of the bailout package.
In recent days, Mr. Rehn has said forcing bondholders to take a haircut was not on the agenda. He also said Friday that European leaders must not allow the "relative calm" in financial markets "to lower the level of ambition or slow down the completion of the reforms."
However, commission officials are privately concerned about the willingness of Germany in particular to show flexibility in the face of strong domestic political pressures to take a tough line.
In the Handelsblatt interview, Mr. Rehn was quoted appealing to German lawmakers to support the package of reforms that emerge from this month's negotiations.
"I ask the Bundestag [lower house] not to ignore remaining difficulties in financial markets," he was quoted as saying.
German Chancellor Angela Merkel needs the support of the Bundestag to increase the amount of aid Germany could provide its euro-zone partners under the current European bailout mechanism and to approve any major reforms of euro-zone fiscal rules. Germany is already by far the biggest contributor to the fund.
Members of Ms. Merkel's governing coalition have at times been critical of her moves to bind Germany more tightly to its euro-zone neighbors in the wake of a debt crisis. Political considerations will probably continue to constrain practical efforts by Germany to play a more meaningful role
On Friday, Ms. Merkel met with Mr. Kenny in Helsinki during a gathering of center-right European leaders. An official said Ms. Merkel signaled her willingness to renegotiate the terms of the Irish bailout—and look again at the Greek terms—if those governments sign onto tough additional reforms.
"The German position is [that there can be] a change to the Irish program only alongside additional measures that will make the country more competitive and less debt-laden," the official said.
Greek Prime Minister George Papandreou, whose government received a €110 billion bailout from the EU and International Monetary Fund in May, has also called for the terms of that package to be eased.
On Friday, Mr. Papandreou warned his fellow Greek Socialists of a new round of market turmoil if European leaders fail to reach a satisfactory solution to the continent's debt crisis this month.
On Monday, senior officials from the euro zone will meet again to continue talks on the reform package. The economic reforms Ms. Merkel is seeking from Ireland are a nod to her proposed "competitiveness pact," an agreement she wants from euro-zone leaders to coordinate fiscal policy and undertake some painful reforms, such as raising retirement ages and synchronizing corporate tax rates.
Speaking Friday, Ms. Merkel said "agreement is building, and we've reached a new level" of understanding that such commitments are necessary. But she acknowledged that the final agreement may include only a broad agreement to pursue reforms in place of specific policies.
Austerity vs. Stimulation
By Grant de Graf
[Sourced and adapted from an article by Antonios Sangvinatsos, a professor of Finance at Stern School of Business, New York University]
Trying to Understand the Multiplier Effect
Austerity measures are usually combinations of government spending cuts and increased taxes. Stimulating practices, on the other hand, are consisted of combinations of the exact opposite actions, increasing government spending and/or reducing taxation. Therefore, it is clear that perhaps one has to choose one or the other, austerity or stimulation.
The above premise is based on the belief that one can create stimulation in the economy by increasing government spending or reducing taxes, and that one can save money by cutting spending or increasing taxes. But how much of it is true? Are the policies that help the country’s balance sheet hurt the economy’s growth? This article attempts to answer both questions.
It is always the case in economics, that an action generates more than one effect and often times these effects move in opposite directions. This is the case also here. Let us start with the alleged austerity measures and their effects.
Austerity Measures
Spending Cuts
Effect on Output: Output may decline.
Effect on Balance Sheet: Interest rates may decline.
Tax Hikes
Effect on Output: It may decline.
Effect on Revenues: Collected taxes may go up or down.
Spending Effect on Output
In what follows the consequences of spending cuts will be discussed, or increasing spending, on output. The current economic situation is described by anemic growth and high debts. Currently the discussion has focused on whether one, for example the U.S., should engage in tight fiscal policy, and more specifically, in cutting spending. This week FT hosts a debate on the same topic inviting articles from renowned economists.
Whether spending has an effect on output is summarized by the value of the spending multiplier. This is a number that stands for the number of dollars is generated in output by one dollar spent by the government. Advocates of spending policies justify their opinions on spending multiplier greater than 1.0. How much of it is true?
The answer is that, at best, the academic community has been inconclusive about the effectiveness of spending on stimulating output. This means that there is a lot of doubt, in the academic community, that spending works, i.e. that spending has a multiplier value greater than one.
For example, Barro and Redlick (paper link, WSJ article) find that defense spending has a multiplier of 0.6-0.7 at the median unemployment rate – while holding fixed average marginal income-tax rates – and there is some evidence that the spending multiplier rises with the extent of economic slack and reaches 1.0 when the unemployment rate is 12%. Estimating spending multipliers for non-defense spending is problematic as the nondefense government purchases are positively correlated with the business cycle and it is difficult to establish causality. Is it the spending that created growth or the growth that spurred government into spending? Barro and Redlick think the latter.
The same ideas are reiterated also in an FT article by Kenneth Rogoff. He believes that:
“At the same time, the stimulus benefits of massive fiscal deficits are not nearly so certain as proponents of a new surge of spending maintain. The academic evidence on Keynesian growth effects of fiscal deficits is thoroughly inconclusive. Ironically, a lot of the newfound conviction comes from the casual empiricism on the growth effects of the Bush tax cuts, evidence that few academics consider sufficient to outweigh the mass of previous results. Indeed, it will take researchers many years, perhaps decades, to sort out the effects of the massive fiscal stimulus that many countries undertook during the crisis. My guess is that scholars will ultimately decide that fiscal policy was far less important than monetary policy and measures to stabilize the banking system.”
In addition, a rough method I employ gives me a spending multiplier of 0.6, less than 1.0, rendering spending an ineffective policy. Finally, there are people who argue that the multiplier is negative, in which case, spending by the government decreases the output. This is also called crowding out.
There are however economists who argue that the multiplier is greater than one. Christina Romer, head of the President Obama’s Council of Economic Advisers, and Mark Zandi, from Moody’s, claim that the multiplier is 1.6. Note that, Keynes believed that the U.S. multiplier in the 1930s was 2.5.
Policy Implications
It is clear, now, that if the value of the multiplier is what the consensus has it in the academic community, around 0.6 or lower, cutting spending will have a small effect on output, as it is also the case that giving another stimulus package will generate little additional growth in the economy. Clearly, the opposite is true if the multiplier is 1.6 or higher, like some people advocate. However, the benefits of any policy have to be weighed with the benefits or costs of contingency scenarios. A policy creates repercussions that also need to be evaluated. For example, spending cuts may or may not decline the economy’s output, but it also has an effect on the country’s balance sheet, the expectations of both the bond investors and the consumers. A policy decision is an act of balancing the fears of all the groups that are involved in a given situation. (Prof. Antonios Sangvinatsos, elaborates in an article the big number of factors that affect the value of debt.)
One may conclude that the effectiveness of either austerity or stimulus will be largely determined by the economic sectors that are targeted by authorities to invoke their policies. Ultimately, some areas of government cuts or spending will have a greater impact than others.
Ref: http://sangvinatsos.blogspot.com/2010/07/austerity-vs-stimulation-effectiveness.html
[Sourced and adapted from an article by Antonios Sangvinatsos, a professor of Finance at Stern School of Business, New York University]
Trying to Understand the Multiplier Effect
Austerity measures are usually combinations of government spending cuts and increased taxes. Stimulating practices, on the other hand, are consisted of combinations of the exact opposite actions, increasing government spending and/or reducing taxation. Therefore, it is clear that perhaps one has to choose one or the other, austerity or stimulation.
The above premise is based on the belief that one can create stimulation in the economy by increasing government spending or reducing taxes, and that one can save money by cutting spending or increasing taxes. But how much of it is true? Are the policies that help the country’s balance sheet hurt the economy’s growth? This article attempts to answer both questions.
It is always the case in economics, that an action generates more than one effect and often times these effects move in opposite directions. This is the case also here. Let us start with the alleged austerity measures and their effects.
Austerity Measures
Spending Cuts
Effect on Output: Output may decline.
Effect on Balance Sheet: Interest rates may decline.
Tax Hikes
Effect on Output: It may decline.
Effect on Revenues: Collected taxes may go up or down.
Spending Effect on Output
In what follows the consequences of spending cuts will be discussed, or increasing spending, on output. The current economic situation is described by anemic growth and high debts. Currently the discussion has focused on whether one, for example the U.S., should engage in tight fiscal policy, and more specifically, in cutting spending. This week FT hosts a debate on the same topic inviting articles from renowned economists.
Whether spending has an effect on output is summarized by the value of the spending multiplier. This is a number that stands for the number of dollars is generated in output by one dollar spent by the government. Advocates of spending policies justify their opinions on spending multiplier greater than 1.0. How much of it is true?
The answer is that, at best, the academic community has been inconclusive about the effectiveness of spending on stimulating output. This means that there is a lot of doubt, in the academic community, that spending works, i.e. that spending has a multiplier value greater than one.
For example, Barro and Redlick (paper link, WSJ article) find that defense spending has a multiplier of 0.6-0.7 at the median unemployment rate – while holding fixed average marginal income-tax rates – and there is some evidence that the spending multiplier rises with the extent of economic slack and reaches 1.0 when the unemployment rate is 12%. Estimating spending multipliers for non-defense spending is problematic as the nondefense government purchases are positively correlated with the business cycle and it is difficult to establish causality. Is it the spending that created growth or the growth that spurred government into spending? Barro and Redlick think the latter.
The same ideas are reiterated also in an FT article by Kenneth Rogoff. He believes that:
“At the same time, the stimulus benefits of massive fiscal deficits are not nearly so certain as proponents of a new surge of spending maintain. The academic evidence on Keynesian growth effects of fiscal deficits is thoroughly inconclusive. Ironically, a lot of the newfound conviction comes from the casual empiricism on the growth effects of the Bush tax cuts, evidence that few academics consider sufficient to outweigh the mass of previous results. Indeed, it will take researchers many years, perhaps decades, to sort out the effects of the massive fiscal stimulus that many countries undertook during the crisis. My guess is that scholars will ultimately decide that fiscal policy was far less important than monetary policy and measures to stabilize the banking system.”
In addition, a rough method I employ gives me a spending multiplier of 0.6, less than 1.0, rendering spending an ineffective policy. Finally, there are people who argue that the multiplier is negative, in which case, spending by the government decreases the output. This is also called crowding out.
There are however economists who argue that the multiplier is greater than one. Christina Romer, head of the President Obama’s Council of Economic Advisers, and Mark Zandi, from Moody’s, claim that the multiplier is 1.6. Note that, Keynes believed that the U.S. multiplier in the 1930s was 2.5.
Policy Implications
It is clear, now, that if the value of the multiplier is what the consensus has it in the academic community, around 0.6 or lower, cutting spending will have a small effect on output, as it is also the case that giving another stimulus package will generate little additional growth in the economy. Clearly, the opposite is true if the multiplier is 1.6 or higher, like some people advocate. However, the benefits of any policy have to be weighed with the benefits or costs of contingency scenarios. A policy creates repercussions that also need to be evaluated. For example, spending cuts may or may not decline the economy’s output, but it also has an effect on the country’s balance sheet, the expectations of both the bond investors and the consumers. A policy decision is an act of balancing the fears of all the groups that are involved in a given situation. (Prof. Antonios Sangvinatsos, elaborates in an article the big number of factors that affect the value of debt.)
One may conclude that the effectiveness of either austerity or stimulus will be largely determined by the economic sectors that are targeted by authorities to invoke their policies. Ultimately, some areas of government cuts or spending will have a greater impact than others.
Ref: http://sangvinatsos.blogspot.com/2010/07/austerity-vs-stimulation-effectiveness.html
Thursday, February 24, 2011
Need for Portuguese Bailout Not Justified by Numbers
By Grant de Graf
Portugal has raised €4.75 billion ($6.5 billion) via bond sales so far this year. But it now faces redemptions totaling €3.848 billion in maturing Treasury bills in March, according to data from Portugal's Treasury and Government Debt Agency. It then has €4.342 billion in bond redemptions in April, followed by €4.933 billion to be paid out in June. According to simple arithmetic, that leaves Portugal with about €8 billion short.
This deficit is nowhere near the shortfalls that were endemic to the Greek and Irish bailouts, even based on percentages. True, Portugal is a smaller economy and some will argue that this may well be the straw that breaks the camel's back. Most certainly, Portugal could always turn to the European Central Bank to avail it of a credit line, or raise the shortfall through a bond auction. The most probable outcome is that both alternatives will be pursued, even if it is structured in a way less conspicuous to the market.
Pundits are predicting a collapse of the country, given the "punitive" interest rates that Portugal will need to pay. In the bigger scheme of things, taking a long term view, those interest rates may actually be quite low. Ultimately, Portugal and the ECB will need to structure a blueprint that will work for Europe in its entirety. The need to resolve short term imbalances is important, but hardly of game changing significance in the bigger scheme of things. One thing is for sure. Nothing is certain.
Irish Bailout May Unleash Vigilantes on Portugal: Euro Credit
November 19, 2010, 8:36 AM EST
By Matthew Brown
Nov. 19 (Bloomberg) -- A resolution of the Irish debt crisis may shift the burden of speculation to Portugal.
While officials such as European Central Bank Vice President Vitor Constancio predict a bailout of Ireland will reduce financial pressures in the euro region, analysts from Citigroup Inc. and Nomura International Plc say any relief would be short-lived as investors turn their focus to the next-weakest peripheral nation.
The markets indicate that country is Portugal with 10-year bond yields of 6.88 percent, compared with 8.26 percent in Ireland and 11.62 percent in Greece, which received rescue funds in May from the European Union and International Monetary Fund. Portuguese Finance Minister Fernando Teixeira dos Santos said Nov. 15 that while “there is a risk of contagion,” that doesn’t mean the country will seek financial aid.
“Portugal isn’t in the situation that it is now because of Ireland,” said Steven Mansell, director of interest-rate strategy at Citigroup Global Markets Ltd. in London. “If Ireland reaches an agreement to tap the European Financial Stability Facility or some other mechanism to support its banking sector, I don’t think that will alleviate the pressure on Portugal.”
The government has forecast that economic growth in Portugal will slow to 0.2 percent in 2011 from an estimated 1.3 percent this year. Portugal has made less progress at taming its deficit than some of the other peripheral nations. In the first nine months, the central government’s deficit rose 2.3 percent from a year earlier. That compared with a decline of more than 40 percent in Spain and more than 30 percent in Greece.
Record Yields
While Portugal has no plans to sell more bonds this year, so-called market vigilantes drove up yields on its debt during the past month amid doubts about the country’s efforts to reduce the budget deficit. The 10-year yield reached a euro-era record of 7.25 percent on Nov. 11, 484 basis points higher than benchmark German bunds of similar maturity.
Portuguese 10-year yields are little changed this week, while Irish yields fell 10 basis points. The spread between the 10-year Portuguese bonds and German bunds rose 6 basis points today to 410.
Investors who push up yields to alter government policy are known as vigilantes, a term coined in 1984 by economist Edward Yardeni, president of Yardeni Investments Inc. in New York. They were credited with forcing Bill Clinton to cut the U.S. deficit after he came into office in 1993, helping drive 10-year Treasury yields down to about 4 percent by November 1998 from above 8 percent in 1994.
While Irish and Portuguese bonds probably would rise with a bailout agreement for Ireland, any gains wouldn’t change the underlying problems for peripheral Europe, according to Charles Diebel, head of market strategy at Lloyds TSB Corporate Bank.
Greece Than Ireland
“Wait a few weeks and the markets will just go for someone else, with Portugal at the front of the queue,” London-based Diebel said. “The vigilantes pushed Ireland into the same situation Greece is in. Why would you conclude they won’t do the same to Portugal?”
Ireland’s debt crisis was triggered by the rising cost of bailing out the nation’s banks, including Anglo Irish Bank Corp. and Allied Irish Banks Plc. While Portugal doesn’t face a crisis in its financial industry, it has a larger debt burden and the country has almost 10 billion euros of debt that comes due during the first half of 2011, data compiled by Bloomberg show.
Teixeira dos Santos, the finance minister, said in parliament two days ago that Portugal wants to continue financing itself in the markets.
‘Significantly at Risk’
“Portugal needs more cash than Ireland does because they go to the market on a regular basis,” said Nick Firoozye, head of interest-rate strategy at Nomura in London. “The market may move onto Portugal at some point because it’s significantly at risk.”
While Ireland started to reduce spending in 2008, Portugal has been slower to address its fiscal deficit, the fourth- largest in the euro region, and the government failed to reach an agreement with its biggest opposition party on the 2011 budget plan until the end of last month.
Portugal has proposed to lower its total wage bill for public workers by 5 percent, freeze hiring and raise the so- called value-added tax by 2 percentage points to 23 percent.
The government is counting on exports such as paper and wood products to support expansion. Portugal’s economy unexpectedly grew 0.4 percent in the third quarter from the previous three months, beating economists’ estimates for a contraction, as exports rose and imports grew at a slower pace.
Still, the Organization for Economic Cooperation and Development yesterday forecast the economy will swing to a contraction of 0.2 percent next year.
“Their view on fiscal consolidation is still premised on an excessively-optimistic growth projection,” Citigroup’s Mansell said. “Portugal is hugely reliant on the fortunes of its neighbors and it takes a huge stretch of the imagination to see growth remaining buoyant.”
--With assistance from Joao Lima in Lisbon. Editors: Tim Quinson, Andrew Davis
Portugal's Debt
By EMESE BARTHA And PATRICIA KOWSMANN FOR DOWJONES AND WSJ
FRANKFURT—Some European officials are quietly discussing contingencies for what might be a Portuguese request for financial aid as early as next month, when the highly indebted country begins facing large-scale debt redemptions.
Financial pressure on the country's treasury is increasing, a topic that is likely to come up at the March 11 and March 24 meetings of European Union leaders, according to people familiar with the discussions.
"The feeling is that it can't go without a bailout beyond March or April at the latest and is already under pressure by countries like Germany to ask for help, to get it so the situation in the euro zone becomes more clear," a senior euro-zone government official said. Some Portuguese officials are privately considering the possibility, this official said.
Portugal has raised €4.75 billion ($6.5 billion) via bond sales so far this year. But it now faces redemptions totaling €3.848 billion in maturing Treasury bills in March, according to data from Portugal's Treasury and Government Debt Agency. It then has €4.342 billion in bond redemptions in April, followed by €4.933 billion to be paid out in June.
That borrowing volume will come at a stiff price. Ten-year Portuguese yields Tuesday were hovering near multiyear highs of 7.344%, well above the 7% level at which debt-servicing costs are deemed unsustainable.
The Portuguese debt agency skipped a time window for a bond auction this week, probably because of high costs. At these levels, Portugal is paying a painful 4.18 percentage points more than the German government on equivalent 10-year bonds.
Another senior European official said many around the EU consider it only a matter of time before Portugal asks for a bailout package similar to the deals struck with Greece and Ireland last year.
Portugal's already detailed reform plans mean much of the work needed to put a package together has already been done. That means the European Commission—the EU's executive arm—could move quickly once a request comes in, the official said.
Athanasios Orphanides, a member of the European Central Bank's governing council, said in an interview over the weekend that Portugal's case is "particularly urgent." He warned that failure at next month's summits to come up with convincing changes to fiscal policy and competitiveness in the bloc could destabilize the 17-country euro zone.
Officially, the Portuguese government remains resolute in declining the need for outside help to extricate the country from its fiscal straits.
That could be at least in part due to national politics. Portugal's largest opposition party, the center-right Social Democrats, has raised the possibility it could put forward a censure motion against Prime Minister José Socrates' minority government.
But market watchers are betting otherwise, believing that Portugal is approaching the end game in its struggle with fiscal deficits.
"They will seek help," said Jan von Gerich, a senior analyst at Nordea in Helsinki, adding that the timing is the more uncertain factor than whether or not the country will ask for assistance.
"I don't think they can manage unless the March summits come up with another idea," he said, adding that he expects a decision on Portugal's bailout before its April bond redemption.
—Laurence Norman in Brussels contributed to this articleTuesday, February 22, 2011
Geithner Scolds Europe for Light Regulation
By JASON DOUGLAS for Dow Jones for WSJ
LONDON—U.S. Treasury Secretary Timothy Geithner said he doesn't believe a controversial austerity program embarked on by the U.K.'s coalition government will hurt Britain's economic growth.
Critics of Mr. Geithner's U.K. counterpart, Chancellor of the Exchequer George Osborne, have warned that the Conservative-led government's program of tax rises and spending cuts will cripple a fragile economic recovery.
In a radio interview recorded at the weekend and broadcast on British Broadcasting Corp. on Tuesday, Mr. Geithner said he didn't see much risk that Mr. Osborne's strategy would compromise growth.
"I am very impressed, as one man's view looking from a distance, at the basic strategy he has adopted," Mr. Geithner said. "At a time when it was easier to make tough choices quickly, he locked this coalition into a set of reforms that were very good."
While the U.K. and most of Europe have embarked on austerity drives to tackle problematic public finances, the White House has continued with an economic-stimulus program and proposed a slower path of fiscal consolidation.
Mr. Geithner said this difference in strategy between the U.K. and U.S. reflects differing circumstances. The U.S. has a smaller deficit relative to its economy, better underlying growth dynamics and a smaller government, Mr. Geithner said.
"Our fiscal challenges are very different from what you face in the U.K. and Europe as a whole," Mr. Geithner said.
He said the U.S. and Europe share similar challenges in funding "unsustainably expensive" commitments on health care and pensions.
But he added, "Our demographics are better, our growth rates are higher and those commitments are less expensive for us than they are for most of Europe. "That's not a challenge for us of the next three years or five years. That's a challenge for us of the next 50 years."
Mr. Geithner also criticized the light-touch regulation of the financial system that existed in the U.K. prior to the financial crisis, saying it was deliberately designed to lure business away from the U.S. and Europe and ultimately proved "very costly."
Mr. Geithner said international change in the financial sector will be a very complicated long-term challenge. "We have to make sure we act on reform while the memory of the crisis is still acute," he said.
European Central Bank to Raise Interest Rates
By NICHOLAS WINNING from Dow Jones for WSJ
LONDON—Euro-zone private sector output is growing at the strongest rate for more than four-and-a-half years, but surging inflation suggests the European Central Bank may raise interest rates sooner than expected, the preliminary results of a survey by financial information firm Markit showed Monday.
The euro-zone economy could grow 0.7% in the first quarter, up sharply from the disappointing 0.3% expansion seen in the final three months of 2010 when activity was hit by severe winter weather, according to Chris Williamson, chief economist at Markit.
There are also signs that divergences between strong growth in Germany, Europe's biggest economy, and the smaller states at the heart of the currency area's debt crisis may be starting to narrow, he said.
"Less welcome are the signs of inflationary pressures building up. The jump in rates charged for goods and services was the largest ever recorded by the survey, highlighting the speed with which prices are being driven higher by rising food, oil and other commodity prices," Mr. Williamson said.
The flash reading of the euro zone's Composite Output Index, a gauge of activity based on partial results of a survey of manufacturing and services firms, rose to 58.4 in February from 57 in January, the highest reading since July 2006. A reading above the neutral 50 level indicates an expansion in activity.
The manufacturing Purchasing Managers' Index rose to 59.0 from 57.3 in January, the highest reading since June 2000, while the Services Business Activity Index rose to 57.2 in February from 55.9 the previous month, marking the strongest reading since August 2007.
Economists said the results of the survey increased the risk that the ECB could start tightening monetary policy earlier than expected. The central bank, which aims to keep inflation just below 2% over the medium term, has held rates at a record low of 1% since May 2009.
"Our forecast is for the first rise in rates to materialize in the fourth quarter this year, with various factors holding the ECB back, including a potential logjam in political discussions over bolstering the support mechanisms for countries in difficulty, and weak money and bank lending growth," said Ken Wattret, chief euro-zone market economist at BNP Paribas.
Growth in new orders gathered pace for the fourth month running and at the sharpest rate since June 2007. Manufacturing new orders grew at a rate equal to last March's 10-year high, with exports showing the largest monthly increase since April 2000. Services new business posted the strongest monthly gain since August 2007.
Employment rose for the 10th consecutive month in February as backlogs of work posted the largest monthly increase since July 2006, but job creation remained well below the pre-crisis peak, Markit said. Manufacturers took on staff at the fastest pace since June 2000, but a far more modest increase was registered in the services sector.
"Today's better-than-expected PMI data indicate that the euro-zone recovery is still in full swing, and remains little affected by the lingering sovereign debt problems in the region," said Martin van Vliet, an economist at ING. "This, coupled with signs of inflationary pressures building, reinforces expectations of a first ECB rate hike in the second half of this year."
Tuesday, February 15, 2011
Euro-Zone Growth Weaker Than Expected
A crane operates behind a row of discarded refrigerators in Duisburg, Germany. German growth slowed to 0.4% in the fourth quarter from 0.7% in the third.
By NICHOLAS WINNING for the WSJ
LONDON—Euro-zone growth was slightly weaker than expected in the final quarter of 2010 as Germany was hit by severe winter weather, France's economy failed to accelerate, and Greece and Portugal contracted, preliminary official data showed Tuesday.
Euro-zone gross domestic product grew 0.3% for the second consecutive quarter in the period from October to the end of December, the European Union's Eurostat agency said. Economists were expecting quarterly growth of 0.4%, according to a Dow Jones Newswires' survey last week.
On a year-to-year basis, GDP was 2% higher than in the fourth quarter of 2009—up from growth of 1.9% in the third quarter but short of market expectations of a 2.1% expansion. For the year as a whole, the euro-zone economy grew 1.7% in 2010, following a record 4.1% contraction seen the previous year when the single currency area was in the grip of a severe recession due to the credit crisis and drop in global trade.
In the currency area's largest economies, German growth slowed to 0.4% in the fourth quarter from 0.7% in the third, France expanded 0.3% for a second consecutive month, while Italian GDP rose just 0.1%.
Among the smaller states at the center of the euro zone's debt crisis, many of which have introduced severe austerity measures, Greece contracted 1.4% on the quarter, Portugal shrunk 0.3% and Spain grew just 0.2%.
In a separate release, Eurostat said the 16 countries that shared the euro at the time had a combined global goods trade deficit of €500,000 million ($677,350) in December following a revised €1.5 billion deficit in November. Economists were, on average, predicting a €1.2 billion surplus.
The breakdown of the data showed euro-zone goods exports totaled €133.6 billion in December, a 20% increase annually, but imports grew 24% to €134.2 billion. However, exports were 5% lower on a monthly basis in December, while imports fell 5.6%. For the year as a whole, the euro zone's trade surplus shrank to €700,000 million in 2010 from €16.6 billion in 2009 as the rise in imports outpaced that of exports.
Exploiting Inflation to Advantage: Trade Play
Click to enlarge image
How to Play Expected Inflation From the TIPS Spread
By: Kirk Lindstrom
The “TIPS Spread” is a simple comparison between the yield of Treasury Inflation Protection Securities (TIPS) and the yield of conventional U.S. Treasuries with the same maturity date. You calculate the TIPS Spread by subtracting the current yield on TIPS from the nominal U.S. Treasury bond yield for the term in consideration.
The “TIPS Spread” tells you what Treasury bond investors, on average under normal conditions, expect for the average inflation over the term. Those who expect inflation to be higher than the spread will buy TIPS. Likewise, those who expect inflation to be lower than the spread buy regular U.S. Treasuries.
For example, today the 10-year TIPS has a base rate of 1.32%. When you subtract that from the 10-year Treasury yielding 3.63% you get a difference of 2.31%. This means Treasury investors "break-even" in TIPS vs. regular U.S. Treasuries if inflation averages 2.31% over the next 10 years. TIPS will do better if inflation is higher.
Likewise, the longest maturity available is the 30-year TIPS which has a 2.16% base rate. When you subtract that from the 30-year Treasury yielding 4.69% you get a difference of 2.53%. This means Treasury investors "break-even" if inflation averages 2.53% over the next 30 years.
This chart shows the historical base rates for TIPS with maturities of 5, 10, 20 and 30 years back to 2004 plus the "expected inflation" rate using the 10 and 30 year TIPS spread.
Exchange traded funds that invest in TIPS include:
- iShares Barclays TIPS (TIP)
- PIMCO 1-5 Year U.S. TIPS (TIPZ)
- Schwab U.S. TIPS (SCHP)
- Managed mutual funds that invest in TIPS include:
- Fidelity Inflation-Protected Bond (FINPX)
- Vanguard Inflation-Protected Secs Inv (VIPSX
DISCLOSURE:
The author owns a very small amount of gold hidden in the house for bribes if we see Armageddon but I own "treasury inflation protected securities" (TIPS) mutual funds (like the ETF TIP or managed funds FINPX, VIPSX) and Series I-Bonds as well as individual TIPS. He also believe it is a good time to own equities including SPY, the exchange traded fund for the S&P500, for both inflation protection and income. Unless something major changes with the markets, he plans to buy the 30-year TIPS with the 2/15/2041 maturity date on the auction that closes on 2/17/2011 directly through a broker for regular and ROTH IRAs.
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