Posts Tagged ‘ France ’

Qui n’avance pas, recule

November 16, 2015
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Qui n’avance pas, recule

We all eat at restaurants, go to stadiums, and walk down the street. The tragically successful terrorist attacks in Paris highlight the vulnerability of the human condition at any instant. While this has always been the case, and will continue to be so, civilization, and human progress, over past centuries and decades, reduces the chance of random death from a vulgar, inhumane cause. Radical Islamic terrorism is so deplorable because the aim is to destroy, to undo, to move backwards in time, and to return to a harsher world. The impossibility of the ultimate success of the radical Islamic movement is matched with the fervor of the very small percentage of the world population that supports this movement. To create the scale necessary to carry out such large scale...

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Europe’s Prisoner’s Dilemma – LTRO Needs to Continue for Years

May 22, 2012
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Europe’s Prisoner’s Dilemma – LTRO Needs to Continue for Years

European leaders have inadvertently created one of the financial world’s largest negative feedback mechanisms. By issuing long-term refinancing operations (LTRO) with cheap ECB funding for terms up to three years and encouraging European banks to take the funding and purchase assets such as sovereign debt, the ECB effectively has encouraged the European financial system to purchase and hold “money good” European sovereign debt. With cheap funding available and the ECB encouraging banks to take the money and invest/lend a situation was created where the natural buyers of sovereign debt were propped up and supported. With many of the bonds in Spain and Italy having maturities in the vicinity of 5-10 years, there is a good chance that the LTRO will need to continue for a number of years until...

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Deja Déjà Vu – A Third Summer of European Crisis

May 18, 2012
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Deja Déjà Vu – A Third Summer of European Crisis

Over the past week, it has become clear that a third annual conflagration throughout Europe is upon us. The crisis has morphed yet again, and like The Hydra, it has come back in a more menacing form. The issue this summer is more profound than the “sovereign debt crisis” which struck last summer. Last summer’s issues were always containable with simple resolve from the ECB. The market forced the issue in sudden manner and eventually a fix came in the form of 3-year long-term refinancing operations (LTRO). Astute observers will notice that today, sovereign debt rates, while higher, have not flared up to the levels they reached last year. European interest rates should not approach summer levels because there is a set playbook that works to contain sovereign rates...

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Like QE, the ECB’s Long-Term Refinancing Operations Will Continue for Years

April 23, 2012
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Like QE, the ECB’s Long-Term Refinancing Operations Will Continue for Years

I came across an article in The Telegraph by Ambrose Evans-Pritchard which does a good job highlighting the circularity of the ECB’s LTRO and associated bond buying. As banks throughout Europe took advantage of ECB stimulus, which they were de facto encouraged to do by Mario Draghi and the ECB, it is clear that both the stimulus itself, as well as ECB sovereign debt purchases, will be needed until there is a solid economic recovery throughout the periphery of Europe. With austerity implementation to reduce deficits, economic recovery for many counties in Europe could be years away. With the automatic stabilization mechanisms in peripheral Europe broken as weaker economic growth leads to higher interest rates it will become necessary for Europe to continue to cap interest rates to avoid...

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When Greek Debt Servicing Resolves – Spain is the Key to the Eurozone Compact

February 2, 2012
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When Greek Debt Servicing Resolves – Spain is the Key to the Eurozone Compact

The Spanish Empire reached the height of its powers in the 1500’s. Naval supremacy, decades of rapidly rising wealth, discovery of gold, and influence over the Catholic papacy led to Spain becoming a dominant world power. It wasn’t until Philip II and The Great Armada’s defeat against the English in the Anglo-Spanish War that Spain’s global power and sphere of influence crested. Fast forwarding 400 years, all of Europe and Spain are in a new crisis which is economic as opposed to military. As attention inevitably shifts from Greece to the next country at risk of contagion, the dynamics in Spain are likely to determine the EU-17’s future path. Spain has been through the wringer and if the country can emerge from recessionary dynamics, then all of Europe can....

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Inflation in Europe is Sticky – Another Reason the ECB to Remain Balanced

January 12, 2012
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Inflation in Europe is Sticky – Another Reason the ECB to Remain Balanced

December inflation data was released this morning in France and Germany. In both countries, the inflation rate was higher than expected and failed to come down relative to prior months. EU harmonized German inflation was reported at 2.3% and EU harmonized French inflation was 2.7%. Two large economies yet to report inflation data are Spain (to be released on Jan 13th) and Italy (to be released on Jan 16th). The stickiness of inflation shouldn’t be a complete surprise because part of the higher inflation in Europe is structural based on labor market and corporate sector rigidities. The process of implementing the structural reforms which have been described as essential will take a long period of time. The positive flow through to inflation dynamics could take years. Despite inflation remaining...

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Investing Ahead of a European Recession

December 14, 2011
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Investing Ahead of a European Recession

Investing ahead of a recession is like a trip to the dentist for a filling when the Novocain isn’t quite right. You know you are in for some pain, but it’s unclear just how much, and how long it will last. Europe is accepting the German path forward, which will at a minimum, lead to plenty of pain for many countries. Spain, Portugal, Greece, Belgium, Italy, and France are all experiencing, or likely to experience, a recession. Forward looking indicators are declining, confidence is dashed, austerity being implemented, European financial assets down sharply, and interest rates higher. The ECB is taking a minimalist approach to fighting the recession and the 17 countries in the Eurozone have different agendas, interests, and policy aims. In the background of the economic recession, there...

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ECB Cuts Rates 25 Basis Points to 1% – Hawkish Press Conference Q&A Squashes Hopes of Sovereign Debt Purchases in Larger Amounts

December 8, 2011
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ECB Cuts Rates 25 Basis Points to 1% – Hawkish Press Conference Q&A Squashes Hopes of Sovereign Debt Purchases in Larger Amounts

The ECB issued a terse press release detailing an interest rate cut for the main refinancing operations of the Eurosystem (from 1.25% to 1.0%) commencing on December 14th. In addition, the ECB cut rates on the marginal lending facility and deposit facility by 25 basis points. This move was widely expected and had a limited impact on the euro or equity markets. The press conference and Q&A (45 minutes later) with financial reporters was where the real action took place. The only market friendly outcome was the announcement to extend lending to European banks from a one-year to a three-year term. The collateral requirements for these loans are also being loosened. The press conference was predominantly hawkish. When asked about hints earlier in the week that the ECB could...

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Standard & Poors Places Europe on Negative Credit Watch – World Set for Downgrade!?

December 6, 2011
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Standard & Poors Places Europe on Negative Credit Watch – World Set for Downgrade!?

I find it rather ironic that Standard & Poors placed the EU-17 on negative credit watch on the same day the market provided the strongest one-day positive assessment to peripheral Europe’s sovereign credit outlook since August (borrowing costs were down sharply on Monday). I have no issue with actually conducting a downgrade of the entire EU-17, but question how this is of any meaning or particular use to investors? Standard & Poors changed its methodology, and incorporated its own political forecasts into the ratings process, which renders the conclusions difficult to interpret. Not that the ratings were of much predictive use in determining credit quality before this change (see 2008). The question now arises; how does one utilize information from a mostly backward looking set of ratio based credit...

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Mario Monti Announces Serious Austerity Plan for Italy – 2013 Balanced Budget Target Leads to Sovereign Debt Rally

December 5, 2011
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Mario Monti Announces Serious Austerity Plan for Italy – 2013 Balanced Budget Target Leads to Sovereign Debt Rally

Italian Prime Minister, Mario Monti, announced sweeping austerity measures and reforms, bolstering confidence in Italian sovereign debt markets. Monti’s plan includes tax increases, government spending cuts, pension savings and raising the retirement age. Italy needs to enact these reforms over the next couple of years, and there are some political risks to implementation, but the immediate market response is positive for this round of announcements as opposed to the cynical reactions in the summer and fall. Italian 10-year borrowing costs dropped from 6.68% to 6.10%. While it is dangerous to extrapolate any daily changes in sovereign debt yields due to the vagaries of European markets, this change is driven by a major announcement which would impact actual fundamentals (again if implemented) and the change in yields is simply a...

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Germany’s First Failed Bond Auction – The European Crisis Continues to Spread

November 23, 2011
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Germany’s First Failed Bond Auction – The European Crisis Continues to Spread

Germany failed to get bids for 35% of the 10-year bonds auctioned today. Yields are up about 10 basis points this morning. The increase in borrowing cost is insignificant for Germany. Yields are still well below 2%, and Germany continues to benefit from the combination of very low borrowing costs, and a declining euro which helps support export competitiveness. The first sign of German bond market stress does highlight the risk the EU-17 is flirting with; the breakdown in confidence across the entire region. What started as a crisis in Greece has spread one-by-one to the rest of the European sovereigns. The reason the crisis has spread is not based upon profligate actions by the rest of the Eurozone. On the contrary, progress has already been made across Europe...

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Que Lastima – Spain in a Vice as Interest Rates and Unemployment Soar

November 17, 2011
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Que Lastima – Spain in a Vice as Interest Rates and Unemployment Soar

I’ve been writing about the impossibility of the ECB running appropriate monetary policy for 17 different nations. The dilemma couldn’t be more evident when contrasting the economy of Spain with the economy of Germany. Spain actually has less sovereign debt relative to GDP than does Germany. The problem for Spain isn’t the level of debt the country has incurred, but the depth of the current recession and the questionable capitalization of the Spanish banking system. Spanish inflation is running in a range of 1.7%-3.0% depending on how you define it (1.7% core inflation). This morning, bond auctions in Spain only attracted investors at much higher yields, approaching 7%. As a result of higher interest rates and a deepening recession (which is helping to reduce inflation), real interest rates in...

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